Oct 19, 2017
Executives
Kathy Ta - Vice President, Investor Relations Bruce Kiddoo - Chief Financial Officer Tunc Doluca - President and Chief Executive Officer
Analysts
Harlan Sur - JPMorgan Ross Seymore - Deutsche Bank Tore Svanberg - Stifel Ambrish Srivastava - BMO Vivek Arya - Bank of America Toshiya Hari - Goldman Sachs Mark Lipacis - Jefferies John Pitzer - Credit Suisse Blayne Curtis - Barclays Srini Pajjuri - Macquarie Capital Craig Hettenbach - Morgan Stanley Philip Lee - Citi Chris Caso - Raymond James C.J. Muse - Evercore ISI Amit Daryanani - RBC Capital Markets
Operator
Good day, ladies and gentlemen, and welcome to the Maxim Integrated First Quarter of Fiscal 2018 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, Vice President, Investor Relations. Please go ahead, Kathy.
Kathy Ta
Thank you, Jonathan. Welcome everyone to Maxim Integrated's fiscal first quarter 2018 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 Bruce.
Bruce Kiddoo
Thanks Kathy. We continue to successfully execute on our updated business model and grow our top line.
Our first quarter earnings per share exceeded the high end of our guidance range. In gross margin, nearly 67% excluding special items was already within range of our new financial targets for the company.
Revenue in the first quarter was up from the same period a year ago and we are guiding the second quarter to grow well above the seasonality. Let me now discuss our first quarter financial results.
Revenue for the first quarter was $576 million, up 3% from the same quarter a year ago. Our revenue mix by major markets in Q1 was approximately 28% from industrial, 28% consumer, 20% communications and data center, 20% automotive and 4% computing.
It is worth highlighting that industrial plus automotive is nearly 50% of total company revenue, up from 37% over three years ago when we began breaking out our automotive revenue as a step-up category. Let me now turn to the distribution channel.
Distribution comprised 46% of Maxim's revenue in the September quarter. Resales in Q1were strongly up from the same quarter last year.
We ended Q1 with 68 days of inventory in the distribution channel, up 7 days from the Q4. The increase in days was driven by stocking for a specific product ramps in Japan, shifting contract manufactures from direct-to-distribution in Taiwan and stocking Future Electronics, our newest distribution partner in the U.S.
We expect inventory days to decline in Q2 to the lowest 60s with resales expected to be up strongly again from the same quarter last year and through management of channel inventory. Turing to the P&L, Maxim's gross margin excluding special items with 66.9%, approximately flat from the prior quarter driven by strong operational execution.
Special items in Q1 gross margin included intangible asset amortization from acquisitions. Operating expenses excluding special items were $182 million, down $7 million from the prior quarter due to tight cost controls and some one-time benefits.
Special items in Q1 operating expenses included acquisition related charges and restructuring charges. Q1GAAP operating income excluding special items was $203 million, operating margin at 35.2% of revenue is approximately flat from the prior quarter and up 390 basis points from the same quarter a year ago.
The improvement in operating margin was driven by revenue growth, our manufacturing transformation and focused R&D investment strategy. Q1 GAAP tax rate excluding special items was 14%.
GAAP earnings per share excluding special items was $0.60 above our guided range and up 24% from the same quarter a year ago. Turning to the balance sheet and cash flow.
During the quarter, cash flow from operations was $220 million or 38% of revenue. Q1 inventory days ended at a 117, up 3 days from Q4.
Inventory dollars were down 1% from the prior quarter. Gross capital expenditures were 14 million in the quarter, offset by 1 million in proceeds from sale of property.
Capital expenditures are well below depreciation of $24 million for quarter. Trailing 12 months free cash flow ending in Q1 using gross capital expenditures was $819 million or 35% of revenue and up 24% over the same quarter last year.
Our free cash flow yield is nearly 6% at yesterday's closing stock price. For capital return, share repurchases totaled $75 million in Q1 as we buyback approximately 17 million shares.
Dividend totaled $101 million in the quarter or $0.36 per share. The current dividend yield is approximately 3% on yesterday's closing stock price, reflecting the dividend increase we announced last quarter.
We expect buybacks to be consistent with our annual commitment to return 80% of free cash flow to shareholders. Overall, total cash, cash equivalents and short term investments increased by $29 million in the first quarter to $2.77 billion.
Moving on to guidance, our beginning Q2 backlog was $426 million. Based on this beginning backlog and expect returns, we forecast Q2 revenue of $600 million to $640 million.
Second quarter guidance includes $18 million to $22 million of revenue for our final transition to sell in accounting and reflects a 14 week quarter. As the 14th week is the last week of the calendar year, we estimate the revenue benefit to be about half of a normal week.
Excluding the benefit of the accounting transition and the 14th week, Q2 revenue is expected to be above these norm and up compared to the same quarter last year, driven by content growth in automotive, industrial and data center. Q1 gross margin excluding special items is forecasted at 66% to 68% or flat to slightly up from the prior quarter, reflecting ongoing tailwinds providing a long term upward bias to gross margin.
Special items in Q2 gross margin are estimated at approximately $11 million, primarily for amortization of intangible assets. Q2 operating expenses excluding special items are expected to be in the mid-190s due to the 14-week quarter and the full quarter impact of our annual compensation adjustments.
Similar to revenue, we expect operating expenses during the 14th week to be about half of a normal week. We are continuing to tightly manage costs consistent with our updated business model.
Special items in Q2 operating expenses are estimated at approximately $1 million primarily for amortization of intangible assets. Our tax rate for Q2 excluding special items will be 14%, flat from Q1.
We expect this rate to be applicable for all of fiscal year 2018. For Q2 GAAP earnings per share, excluding special items, we expect a range of $0.61 to $0.67.
In summary, we expect continued growth in Q2 revenue compared to the same quarter last year. We are growing content in automotive, industry and data center which is helping to drive growth.
And we are executing in line with the updated financial model disclosed last month resulting in strong earnings and free cash flow group. With that I'll turn the call over to Tunc.
Tunc Doluca
Thank you, Bruce. Good afternoon to all our participants.
Thank you for joining us on the call. And as always we appreciate your interest in Maxim Integrated.
We're pleased with our performance in the September quarter. Revenue growth was led by double-digit increases in industrial and automotive from the same quarter last year.
Looking forward, we expect strong growth in automotive, industrial and data center in the December with continued solid profitability. Our profitability and year-over-year revenue growth is enabling strong earnings power and cash flow.
Let me now discuss our business. I'd like to highlight that my end market commentary for the guided December quarter does not include revenue from our final transition to sell in accounting in distribution.
For details on the growth rates by end market, please refer to our earnings presentation on our website. First, I will comment on automotive.
In the September quarter, automotive was flat and grew in the low-teens from the same quarter last year. In the December quarter, driven by strength in our battery management system business and continued growth in ADAS and infotainment products, we forecast growth that is well above seasonal.
Compared to the same quarter last year, growth is projected to be very strong as well. We're encouraged by the market acceptance of our batter management product for electric vehicles and then recently broadened our basic customers within China and outside of China.
Long term, we continue to expect a year-over-year growth in the low-teens for our automotive business. We are in the early days in the electronification of cars and expect semiconductor content to continue to out phase unit growth.
The cars increasingly becoming a data center on wheels with high-end processors, multiple displays, sensors and cameras. All requiring efficient power management and point-to-point high speed data transmission.
Additionally, the movement towards stricter air quality standards in cities around the world will be significantly increasing demand for electric vehicle. Advance drive assist systems and electric vehicle requirements play to Maxim strengths in efficient power management and serial link technologies.
We have increased our R&D efforts in these areas and continue to expand our pipeline of design-wins. Let me next turn to the industry market.
Our September quarter industry business was down sequentially with typical seasonality but strongly up from the same quarter last year. Within industrial, the core segment led the growth for the sixth consecutive quarter, driven by factory automation products and by progress we made in our broad market initiatives.
In the December quarter, we expect industrial to be up sequentially and exceptionally strong compared to the same quarter last year. This above seasonal performance is again expected to be led by factory automation products and through our strategy to reach small and medium business or SMB customers through distribution partners.
We recently expanded our factory automation applications with Amaron, a key customer in Japan. This customer is adopted our dual-channel IO-Link transceiver solutions to put sensors on the network, increase factory uptime, improve on the fly configurability and provide continues diagnostics and monitoring of the manufacturing flow.
Our IO-Link family of products has become an industry standard which is being widely deployed especially in Europe and Japan. In our broad market business, we continue to improve our online support and website store front and increase the use of analytics to identify, track and maximize the value of opportunities.
In the September quarter, our combined distribution channel comprised 46% of Maxim sales. Our expanded distribution channel partnerships are bearing fruit by brining Maxim's products to more small and medium business customers.
Through this strategy, SMB customer revenue grew 10% compared to the same quarter a year ago. In the September quarter, automotive and industrial markets together contributed 48% of total company revenue.
Let me next discuss communications and data center. In the September quarter, communications and data center was down sequentially and down from the same quarter year.
In the quarter, strong growth in 100G optical products for the data center was offset by broad based softness in communications infrastructure. However, we expect communications infrastructure to be modestly up sequentially in the December quarter.
We anticipate accelerating data center revenue growth during the quarter strongly up sequentially and strongly up from the same quarter last year. This revenue growth is driven by 100G optical products for high speed rack-to-rack connectivity and by cloud serve power management using 12 volt architectures.
Finally, let me turn to consumer. In the September quarter, our consumer business was strongly up sequentially with growth across all of our major product segments.
In the December quarter, we expect consumer to be down sequentially although with more muted cyclicality than we have seen in previously years. The muted cyclicality is due to our diversification in wearables, tablets, peripherals and gaming products.
In consumer, we are seeing growth from a proliferation of smart devices. We participate in a number of wearables, AI home products and new peripherals such as virtual reality headsets.
Key store differentiation include boosted sound quality with our audio products, high accurate CCU gauging for batteries and low standby power in high efficient power management ICs. Maxim's priorities are to grow revenue, to do so profitably and to improve our financial stability.
We are growth automotive, industrial and optical data center into double-digits from the same quarter last year. Our broad market strategy is beginning to bear fruit benefiting from our distribution partnership initiatives and improved reach to small and medium business customers.
Turning to profitability, we are achieving our goals through several initiatives. First, we will grow the higher margin SMB customer revenue.
We recently crossed $1 billion distribution resales milestone and expect to continue to grow this channel with multiple internal initiatives. Second, we have additional gross margin tailwinds that is a multiple year time horizon.
And third, we intend to grow operating spending that half the rate of revenue growth providing us with modest but realizable leverage even at mid-single-digit top line growth. As to stability, we plan to broaden our customer base and not be reliant on any single customer or any single market.
For opportunities without size returns, we will only consider if there; one, fit within our variable manufacturing model. Two, not reduce R&D focused on the diversification.
And three, create long term value. And finally, we remained committed to maximize shareholder value and to lead in the return of capital to shareholders.
With that, I'll turn the call over to Kathy.
Kathy Ta
Thanks, Tunc. 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've 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 hop back into the queue. Jonathan, could we please have our first question?
Operator
Certainly, our first question comes from the line of Harlan Sur from JPMorgan. Your question please.
Harlan Sur
Thanks. Good afternoon and solid job on a quarterly execution and 36% free cash flow margins and just pretty strong overall.
On the December quarter guidance, if I exclude the Disney transition normalize for the 13-week quarter apples-to-apples, I think your business is flat sequentially, it's up 5% year-over-year and obviously, I think as you alluded to that's much better than the seasonal trend of down 2 to 4. Automotive seems to be a big part of that.
So Tunc, last couple of quarters you've sort of characterized the overall demand environment in autos has been relatively soft. So the question is, has the broad demand environment improved or is most of the auto growth in December more about continued content game as you mentioned, any color here would be great?
Thank you.
Tunc Doluca
So, if you look at our numbers on a year-over-year basis, we definitely have strong growth in all of the product lines basically. And the strongest was in the BMS line as I mentioned in my prepared remarks, but both infotainment and safety products, body electronics, they all grew pretty strongly.
I think you're referring more to, is there any issue with the unit sales of cars or slowest in that. We're really not that sensitive to that piece is what we're finding.
It's mostly about content growth. So I think all of the automotive lines we have are doing pretty well and some like BMS did better projected to do better now because the China business - it depends on the China business somewhat which is rather lumpy so we see that more ups and downs in that business.
But we're seeing strength across the broader for our automotive products.
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
Hi guys I want to stick with that automotive theme. Tunc, you mentioned the BMS side and infotainment and power.
As we think about that going forward, can you just give us the puts and takes on what's more important to Maxim over the next year or two between the electrification of the vehicles whether it BMS or other specific functions you do or the autonomous driving side of things, where you have a number of different functions whether it's the time of when those start to kick in or the absolute content that Maxim has from those trends, any sort of color you could give us would be helpful?
Tunc Doluca
Okay. So yeah thanks for the question, Ross.
So first of all just to put things in perspective, the largest piece of the business we have today is infotainment business, which is roughly about two thirds of the revenue and then the others get progressively smaller. That side of the business will continue to grow and some of that revenue is power and some of it is for serial link for our displays and dash board and so on.
So we've got some great product that came out, the pipeline looking good for design wins, so we think that will continue to grow and we're looking to that as a positive growth driver for the automotive product line. In terms of ADAS, you asked about that piece, we have obviously again power management products that go into that and we also have serial link products that in that application actually there are more sockets per car because there are multiple cameras and they all need point-to-point connections.
That revenue growth is really ahead of us, it's not –it has revenue right now but it is much smaller than infotainment but most of the design wins that we're registering today and winning it customers is really kicking in more in the next two years and that's going to be a good growth driver for the company. Our investments are really in driver assist, so whether autonomous cars become a reality or not work or in what time period.
We're kind insensitive to that. It's really mostly for safety in the car for the driver or helping with the actual driving in the car.
The other piece so that piece will be a longer term stronger growth driver but from a smaller based in infotainment obviously. Battery management systems and the use of electric vehicles around the world is actually going to accelerate in my view and we have some great technology in that space for monitoring the state of the batteries and making sure that are used in a safe way as well as extract the most miles you can out of the battery packs.
So several secular growth drivers there are going to help us, obviously one of them is air pollution or air cleanliness that many countries are watching out for and therefore putting in place intensives to get these cars more electric vehicles on the cars. Battery prices are coming down which making the comparisons easier from a cost perspective.
And the electric motor is just such a simpler system in terms of making the part train, I think that's another advantage in general. So we do expect that to grow at a faster rate than for example our infotainment products.
So if you look at the growth rate perspective, I really expect in the long term ADAS or drive resist applications in BMS that have a stronger growth rate but with continued growth were infotainment as well, but since it's got a larger base that growth rate will be more closer to the low teens numbers that we've given for the company.
Ross Seymore
Great. Thank you.
Tunc Doluca
Welcome.
Kathy Ta
Thanks Ross.
Operator
Thank you. Our next question comes from the line of Tore Svanberg from Stifel.
Your question please?
Tore Svanberg
Yes, thank you. I had a question on the industrial business, so looks like it's tracking to be up about 20% in the December quarter and I know it's hard to calculate this but how much of that growth is coming from sort of core secular growth versus some of the strategy that you had to really target more of the small and medium sized businesses?
Thank you.
Tunc Doluca
Yeah so I think you've already gave the answer in your question. It's really hard to quantify whether we're just being affected by the general in growth in the market or from what we did but we estimate that both have an effect right now on Maxim, I mean some of it because the demand has grown and with indicators or the manufacturing PMI shows that there's a general increase in demand for industrial products.
But we also see very strong growth faster than market growth in our factory automation products and that is helping us immensely. And both on the power side actually and on the communication side effect the automation.
The harder piece to quantify is the core business, how much of that is really coming from what we're doing versus what the market is doing. Essentially when we get a year-end reports will be able to see we did in that to some extent because I always ask this question internally as well everybody reports differently, so it's kind of hard to see.
But I think in the industrial front, we do have both elements effecting our performance, both how we're doing factory automation with the strength of the products we've got but also by general demand that's gone up for the market. We have invested significantly in reaching more customers broad based customers or SMB customers and I think that also is definitely healthy.
The great thing about the factory automation fees, it's really and its early innings if you look at these products, they're beginning to grow that we invested in them about I am going to say three or four years ago in product development and they really began to grow strongly in the last couple of years. So I think it's a good tailwind for the company.
Tore Svanberg
Thank you.
Tunc Doluca
You are welcome.
Kathy Ta
Thanks Tore.
Operator
Thank you. Your next question comes from the line of Ambrish Srivastava from BMO.
Your question please?
Ambrish Srivastava
Hi, thank you. I had a question on the channel inventory, Bruce you gave us the details and then you talked about the guide for the quarter after you expected to come down but what I was wondering was could you just put it in context with lead times and also point us to a precedence that that has happened in the past that you had programs like this where you had to increase your channel inventory?
Thank you.
Bruce Kiddoo
Yeah. So from a lead time point of view, it was basically from our ability to deliver was relatively flat at that I think we've always been a target of this kind of right around five to six weeks and generally we've been doing since from a customer point of view, it was flat as well sort of right around that's a 11 to 12 week range that we talked about and that's been very stable in that range.
So I think from a channel inventory point of view, as we said it kind of went up seven days. We did see very strong resale in the in the in the current quarter in the first quarter and we're projecting as the strong resales again in the December quarter.
And so when we look at where the increases are, part of it was in Japan with the gaming product ramp what's most folks are aware of. We moved some contract manufacturers in Taiwan from direct over into distribution and then obviously people know we've been ramping up future.
I don't remember the exact quarter, but I think it was probably about a year ago, we had a spike up in distributions to over 65 days, I think it was like 67 days or something like that. Again where there was just some where the demand was building for some product ramp and then we brought it back down.
This is something which while we're comfortable with kind of the strength of the business and what's driving this increase, we're also very kind of aware that's prudent to make sure we manage that and bring that down of the - strong resales and as a future start selling product right there deal I will become more in line with our target of around 60 days same thing with in Taiwan where the contract manufacturers as they start get hit steady state, they will come down. So it's something we're paying attention to, we're managing it and we're comfortable will bring it down into the low 60s by the end of this quarter.
Ambrish Srivastava
Okay. Thanks to the details, Bruce.
Bruce Kiddoo
Yeah.
Kathy Ta
Thanks Ambrish.
Operator
Thank you. Our next question comes from the line of Vivek Arya from Bank of America.
Your question please?
Vivek Arya
Thanks for taking my question. Tunc, when you look at the current environment, we are seeing this very strong growth environment in automotive industrial products.
I think the investor worry has been that this kind of double-digit growth is well above what we have seen in price cycles. And so how sustainable is this and how would you know, what's on your dashboard to tell you that things are as they should be worse is getting overheated?
What kind of metrics do you look at to just make sure things are not getting out of control?
Tunc Doluca
Well, we look at several things but if you kind of go from the highest level items that we look at obviously, we closely look at the manufacturing PMI, I mean that at the highest level that gives you an idea of whether the order rates are going to go up or down for the end products that people are buying. So that's kind of one indicator that we watch.
We also watch several other items, we look at things like inventory in the channel that's probably a very good indicator of whether things are overheating or not. We listen to our customers, we have some indicators from customers they clearly give us an indication of whether if they're shortages, if there's - and when there are shortages that usually causes people to get more aggressive with their orders.
So we look at those numbers whether our customer at the lead times are extending for us, we don't have really a ton of data on others but we do have it for us. So there's multiple items that we looked at and I think in the previous question Bruce gave some of those answers.
I mean we all know that PMI status that's been improving globally are orderly times have not changed too much at Maxim. Our ability to respond to customer orders is pretty much been flat or actually it's a little bit better probably because of our more flexible manufacturing model.
So we also look at are there any issues with things like the raw wafer for supply or packaging and we're not really seeing, there were some tightness in raw wafer supply but we're quickly able to resolve that. So we look at many metrics and it is something just by goal investors should look at carefully, we look at it to make sure we don't get ahead of ourselves.
But from Maxim's point of view we're not you know we're not really seen supply constraint caused extra ordering from our customers. Now having said all that, we also read the articles, we also look at what our competitors are saying and we do see tightness in the entire supply chain outside of Maxim and we are watching that very carefully.
And as I said we look at all these parameters to see how we should manufacture or whether we - how we react to what customers are asking us to build.
Vivek Arya
Okay. Thanks, very helpful.
Tunc Doluca
You are welcome.
Kathy Ta
Thanks for Vivek.
Operator
Thank you. Our next question comes from line of Toshiya Hari from Goldman Sachs.
Your question please?
Toshiya Hari
Yes, thank you. I was hoping to learn a little bit more about the BMS business, specifically how fast is the business growing today on a year-over-year basis.
And in your long term low teens growth rate assumption for the overall automotive segment, what kind of growth rate from BMS is embedded in that number? And lastly from a competitive standpoint where do you guys stand today and you talked a little bit about broadening out your customer base in China and also penetrating a couple accounts outside of China.
Are you picking up share or are you growing in line with the market? Thank you.
Tunc Doluca
So let me talk about the product and Bruce you can do the numbers. So we have from the acceptance of the products in the market, we're confident that we have very competitive products.
There's - and the parts or competitive because it really requires us to build the capability to make these products that have the required accuracy levels that have the robustness needed both for the products and for their ability to communicate over high voltage separation between cells and so on. That was built over many, many years.
And we really do hear about new competitors coming into the market with their first or second generation products and usually we find their missing or we don't, the customers find they are missing something and it enables us to really keep ahead of them. So the products are strong and as I said we're getting winds kind of in a broad swath of customers and regions in the world so that gives us more confidence that we have a very competitive product.
And obviously we don't just sit on our laurels that we were developing newer generations that are that are even better performance than the older ones. So we believe we're ahead we believe that there's we have significant market share and we believe with new products we're going to be keep ahead of competitors that want to get it.
And I think Bruce, you can kind of say something about the growth rates.
Bruce Kiddoo
Sure. I mean I think the key thing with BMS and when we just think about business overall, it's still fundamentally a very small business, it's you can say it's around 2% of total company revenue or 10% of our automotive business.
It's still lumpy and but even in the September quarter where it was down sequentially due to some of that lumpiness, it's still grew in line with overall automotive business year-over-year. Tunc just talked about some strength in the December quarter on a small base that's resulting in very strong year-over-year growth numbers but again some of that just the lumpiness.
So I think it is one that we do expect to have strong growth if you look at over a five year period above our low teens kind of an overall growth rate for automotive, so similar to the ADAS business, those are two smaller businesses which we believe will provide kind of above average growth to our long term low teens growth rate as sort of the infotainment business kind of stays in the low teens area. And so that's kind of how we think about the BMS it's sort of our one of our kind of long term growth drivers for automotive together with ADAS.
Toshiya Hari
Thanks so much.
Kathy Ta
Thanks Toshiya.
Operator
Thank you. Our next question comes from the line of Mark Lipacis from Jefferies.
Your question please?
Mark Lipacis
Hi, yes, thanks for taking my question. Tunc, last quarter you had mentioned that the consolidation, the industry is translated to some positive dynamics on the pricing side for you.
And I was wondering if you could perhaps give us an update on whether anything has changed in that front or inflected and weather and maybe if whether the increased consolidation is manifesting in positive dynamics in other places in your financial statements or business model? Thank you.
Tunc Doluca
So all right, anyway I got this question last time too. Obviously the consolidation to help stabilize prices in general.
And I think the results in our industry are pretty similar. I think two affects their number one is there are fewer suppliers obviously but also what's happening is that everybody's become more focused on profitability on their companies, so I think they are being more careful about price reductions that they give their customers.
So that's all helps and I think it helps everybody in the industry which is a good thing. So I don't really think things have changed much since three months ago or even six months ago so from that spend point I think it's a good tailwind for not just Maxim but other companies that are that are in the market.
Bruce, do you want to add anything to that or?
Bruce Kiddoo
Yeah just in addition to sort of the benefits we're seen on the pricing side which stretched across both distribution and direct customers, I think you also see some benefit on the supplier side as well. Again there's just fewer companies fewer chip companies out there and there's a not no fund intended on the margin right a little bit more advantage for the chip company in dealing with their supplier base from a cost point of view.
So I think in general, this long term trend have can have better margin associated with consolidation is something that we agree with and we think it's a very nice long term tailwind for Maxim and candidly for the industry.
Mark Lipacis
Thanks for the color, very helpful.
Kathy Ta
Thanks Mark.
Operator
Thank you. Our next question comes from the line of John Pitzer from Credit Suisse.
Your question please?
John Pitzer
Guys, congratulations on the strong profitability once again. I've got a bunch of questions but I'll stick to one and I'll try to make good on a question for Bruce.
I guess Bruce just given the rev rec in June and now again in December and then the extra week, I can't remember a time when sort of street consensus rev estimates had this much variance for Maxim's. I'm wondering if you could help us, I know you guys only guide one quarter out, but as we think about the March quarter, kind of help us understand where you think the right sort of apples-to-apples baseline is in revenue and OpEx of December revenue, it seems like it's around 5.80.
And I guess more importantly given that you guys have gone through this transformation of the business, how do you think seasonality has changed in the business as we think about seasonality in the first half of the calendar year so the count of first quarter count of second quarter? Thank you.
Bruce Kiddoo
Yeah, thanks for the question. I mean there are a lot of moving parts there and it's something that we need to make sure of the overall model on going forward reflected appropriately.
But certainly when we think of margin and as you say we're not giving guidance for March in this call but certainly to the extent that you apply kind of normal seasonal factors, you need to back off the amount for Avnet in December, which we've said is the kind of 18 million to 22 million and then the benefit of the 14th week which we said was about half of a normal week. So I think you have to back those off to get to a clean starting point and you gave a number that sounds reasonable from that point of view.
And then from there right you just look at the typical levers, automotive and industry or usually seasonally up, they are usually good quarters. The only color I would add on that is we're seen obviously strong orders in December for both of those as well.
And so I don't know how that translates into the March quarter but just the fact that we're seeing a very strong December in those areas. In the common data center normally we would tell you that the infrastructure side is not really seasonal but it's more cyclical depending on what's happening.
We are that strategic there. We are doing very well in the data center side and that business especially exactly on the cloud with the cloud providers is growing very strongly.
It's still only if you look at data center versus infrastructure data centers only about a third of the overall business. So I think that it's growing strong it's a little bit muted but I think that will be a positive for us.
And then of course consumer, the only time I've ever really failed in this job is when I try to predict consumer out in time. And so obviously there is Samsung has their normal product ramp during that time period.
That said I think we've done very well diversifying our consumer business and that shows strong growth in the kind of the back half of the calendar year and is usually a little bit lighter in the front half of the calendar year. But we're still learning that business and that cyclicality.
So I think at this point, if you make the adjustment for Avnet, you make the adjustment for the 14th week, I think either sounds more normal seasonal patterns associated with Maxim. Hopefully that's helpful.
John Pitzer
Thank you, Bruce.
Bruce Kiddoo
Yeah.
Kathy Ta
Thanks John.
Operator
Thank you. Our next question comes from the line of Blayne Curtis from Barclays.
Your question please?
Blayne Curtis
Hey, thanks for taking my question. Bruce, I want to ask you about the area that you said you never good forecasting, but in consumer I think you had - obviously of the smartphone headwind but I think you were hopeful that some wearables would help offset, it's down a bit, I was just wondering you go after some of your moving pieces there?
Bruce Kiddoo
So, yeah I mean I think when we look at the consumer business right I mean if you look at Q1, overall it was down about 8% year-over-year that was all driven by phones right, they were down like 30% year-over-year. All the other businesses that we've talked about wearable, gaming even some of the tablets were all up kind of double-digits year-over-year.
And so we've seen kind of that diversification strategy, we think it paying off. That said until we left Samsung I think you're going to continue to see kind of year-over-year pressure in the consumer business and that's why we think you know once you get probably June of 2018, we'll kind of - the comp will get easier on the year-over-year side.
And so that sort of without knowing making a comment about the demand environment, those are sort of kind of the end market puts and takes.
Blayne Curtis
Okay.
Kathy Ta
Thanks Blayne.
Operator
Thank you. Our next question comes from the line of Srini Pajjuri from Macquarie Capital.
Your question please?
Srini Pajjuri
Thank you. Bruce, a question I actually a follow-up to the previous inventory question.
You said you expect the inventory to come down to low 60's I guess in the channel, I'm just curious if that level is what you consider a normal level for the current environment and also given the change in revenue recognition, do you anticipate any change to how you think about your own balance sheet inventory? Thank you.
Bruce Kiddoo
Sure. So our target has been 55 days to 60 days.
I think at this point that's still a good target certainly in a strong demand environment when there's going to be pressure, I think you can you would end up at the high end of that range. But I do what, I think we're focused on even with the strong demand and our stocking strategy of getting that the number back down this quarter down for low 60s and getting it into the kind of the high end of our range of this kind of 55 days to 60 days.
I think from the change to sell-in and to be clear with investors previously all of our international business was on a sell-in basis and our domestic business or U.S. business was on a sell-through and it was about two thirds international one third U.S.
So from that point of view that shift is only been on the U.S. side and you know the majority of our business was already on a sell-in basis.
So it's not as large of a change as you might think. I think the biggest issue from our point of view and my point of view as CFO is I am going to I actively manage what's in that channel, we need to make sure that we don't get over extended in the channel obviously extend that we are looking there strong demand for our products and our customers want the distributors to carry some level of inventory, we need to look at that and support that.
But overall I still want to make sure that we manage the appropriate level and to be very transparent with investors as to what's out there in the channel. As far the impact on our local inventory, I don't think that should change too much, I still think we want to be able to kind of carry the right amount of inventory but not too much and obviously Disney should carry some inventory that's what they're paid for.
And so I don't think we're going to necessarily carry more in our books.
Srini Pajjuri
Thank you.
Bruce Kiddoo
Yeah.
Kathy Ta
Thanks Srini.
Operator
Thank you. Our next question comes from the line of Craig Hettenbach from Morgan Stanley.
Your question please?
Craig Hettenbach
Yes, thank you. I had a question on the infotainment piece within automotive, when your automotive business kind of scaled up a couple years ago, the company gross margins were in the low 60's, now you are approaching high 60's.
So for that particular piece is that impact kind of the opportunity set that you would see in infotainment in terms away trying to manage across margins to?
Tunc Doluca
We are really not seeing as a major issue for the company. Obviously we make differentiated product that deliver a value for the customer.
And we have - so on the design wins side as long as we have differentiation which is one of the rules for being able to develop a product in the company, we should be able to some say on the pricing, but we also have a lot of internal efforts that actually once we get these winds that actually reduce the cost of the product, so we've got, so we really approach that on both sides. One, make products that are highly differentiated.
And number two, when you get the win, make sure you have continuous improvement programs to reduce costs. So with that we think an infotainment will still continue to win designs.
But as we Bruce and I explained that and that's going to grow probably more in line with our automotive growth numbers and a lot of the growth is going to also come from the better management systems products and driver assist system products.
Bruce Kiddoo
And Craig one of the things you may be referring back to is I think when we first broke out our automotive business, we indicated it was below the corporate average and one of those reasons was as we were making a big push on the quality side. And early we were probably testing in quality and we had longer test times for our automotive parts.
I would say over the last three years it's been a companywide initiative to improve quality in automotive and I can't recall the starting point maybe two to three PPM, probably is higher years before that. We're now Sub one PPM and we've done - we have more work to do in that area but we've done a great job designing in quality and making kind of quality throughout the entire design and manufacturing process such that's an area where we've been able to one of those areas Tunc talked about as far as kind of cost reduction through.
We don't have to test in quality, we're building it in throughout the entire development and supply chain process, so that's helped as well. And because of that the automotive while it's still probably a little bit below corporate average, it's certainly not a drag on our overall margin.
And certainly when we set the goals of kind of getting into the high 60s as our kind of long term gross margin that clearly reflected a portfolio of businesses that included automotive at it's kind of contribution level.
Craig Hettenbach
Okay. Got it.
Thanks.
Bruce Kiddoo
Yep.
Kathy Ta
Thanks, Craig.
Operator
Thank you. Our next question comes from the line of Chris Danley from Citi.
Your question please?
Philip Lee
Hi. This is Philip Lee calling on behalf of Chris.
Thanks for taking my question. Can you guys talk about the linearity of the orders in the September quarter please?
Bruce Kiddoo
Yes, generally speaking, we're pretty linear throughout, I mean this is a - we sell lots of parts to customers and so generally there's not - it's not back end loaded. So I would say there was nothing unusual about our linearity this quarter.
Philip Lee
Thanks Phil.
Operator
Thank you. Our next question comes from the line of Chris Caso from Raymond James.
Your question please?
Chris Caso
Yes, thank you. Just a quick follow-up on the inventory in the distribution channel, just a clarification now, is all of the distributor inventory now in sell-in basis including future and if that's the case how long do you expect to take to get down to the target range.
And I guess in the meantime as that's happening, I guess we should assume that the - the sell-in distribution should be below the resale values - resale rates and we should consider that in our forward looking revenues?
Bruce Kiddoo
So let's see, so first off effective this quarter, December quarter everybody is on sell-in now, right you know we make the so Avnet was the last one that was still on a sell-through and starting this quarter they are on sell-in any of that deferred revenue that had been in the in channel inventory that the $18 million to $22 million that we're recognizing this quarter. I think as far as you know the ability to as we said this quarter we're going to drive down to sort of the low 60s., I mean that's primarily a function of strong resales and just be some paying attention to the levels of inventory at the various distributors and some of them like future which is on a sell-in basis when we initially ramp them when we brought them on as they start picking up from a resales point of view though their DLIs won't prove as well.
If you can just for me what was the third question?
Chris Caso
Right, so, yeah as you're draining inventory in the channel therefore I guess the resale would be ahead of what you're sell-in therefore?
Bruce Kiddoo
Sure. I mean so we've accounted for that obviously in our forecast in for the Q2 forecast right to the extent that we are resales will be above that level.
So that way I mean we have like we said very strong resale forecast, but we will our forecast assumes that we're going to manage the sell-in to the channel in order to bring the inventory back to where our target range.
Chris Caso
Understood. Thank you.
Bruce Kiddoo
Yeah.
Kathy Ta
Thanks Chris.
Operator
Thank you. Our next question comes from the line of C.J.
Muse from Evercore ISI. Your question please?
C.J. Muse
Afternoon, thank you for taking my question. I guess I'm hoping to get a little more granularity on Avnet, so could you share what the revenue contribution you expect to look like by segment as well as what kind of impact you think this will have on gross margins?
And if I can sneak one last one and Bruce, how you think about OpEx when we get back to a 13-week quarter in March? Thank you.
Bruce Kiddoo
Yeah, so Avnet will be similar to DigiKey and that is about 50% industrial, about a third common data center and then I think it was 10% in the automotive and consumer areas here.
Tunc Doluca
Yeah. It's right.
Bruce Kiddoo
And so I think that was the primary areas of that.
Tunc Doluca
And your second question was?
C.J. Muse
Apologies guys. In fact to gross margin as well as normalized OpEx into the March timeframe?
Bruce Kiddoo
So, on the gross margin side just like we saw with DigiKey there is some benefit, franchised distributors like Avnet are not at quite the same level profitability as a catalog provider as a DigiKey. I think we had said that the DigiKey was about 50 bps roughly speaking of benefit for us in our Q4 quarter.
I would say in this quarter, it's probably for the Avnet probably closer to like 30 bps of benefit I mean these are rough numbers of course from that point of view. And so when we look forward though, obviously we have the kind of the long term tailwind.
So while that benefit will go away in our Q3 in the March quarter, I think it's reasonable to assume that these long term tailwinds will continue to benefit the company and I wouldn't necessarily expect a drop off in gross margin throughout the rest of fiscal year 2018. As far as operating margins and OpEx, we'll continue to manage it tightly, obviously we're up this quarter with the 14th week, as we said is about half of a normal week and so you'll see OpEx come down obviously in the March quarter.
By that half week, I would say the only potential offset to that is to the extent that the profitability of the company continues to increase then we have sort of a fixed profit sharing plan that's just kind of ramps with profitability. So the extent that we're able to continue to grow revenue and profitability that would be the only offset to the back half week of the 14th week coming out of the numbers.
C.J. Muse
Very helpful. Thank you.
Bruce Kiddoo
Yep.
Kathy Ta
Thanks C.J. And Jonathan I think we have time for just one more question.
Operator
Certainly, our final question then comes in the line of Amit Daryanani from RBC Capital Markets. Your question please?
Amit Daryanani
Thanks. I guess I need to learn the art of asking one question in three parts but maybe I'll stick to one.
Yes just on the gross margin discussion you had right I mean you're guiding revenues up rather strong on a sequential basis, gross margin I think are up 10 basis points equally expert inventory adjustment to sell-in might be down a little at the guide. So I guess, what's the offset to the strong revenue leverage in December that's not enabling a better gross margin uptick in the quarter?
Bruce Kiddoo
Yeah I think part of that is just when we do - when we give a guidance range, we kind of do whole numbers. So when I think of the December gross margin, it's probably flat to slightly up and so even though the midpoint is 67% probably could be a little bit above that even if you just took the sort of the 30 bps that we talk about for Avnet.
So I think some of this is just rounding on margin. I think you will see the benefits and there's nothing else that pulling it down at this point in time.
Amit Daryanani
Fair, thank you.
Bruce Kiddoo
Yeah.
Kathy Ta
Thanks, Amit. Okay, so I think that was our last question and I would like to conclude 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 you participation in today's conference. This does conclude the program.
You may now disconnect. Good day.