Jul 26, 2018
Executives
Kathy Ta - Maxim Integrated Products, Inc. Tunç Doluca - Maxim Integrated Products, Inc.
Bruce E. Kiddoo - Maxim Integrated Products, Inc.
Analysts
Harlan Sur - JPMorgan Securities LLC Ross C. Seymore - Deutsche Bank Securities, Inc.
Ambrish Srivastava - BMO Capital Markets (United States) Sarah H. Linden - Morgan Stanley & Co.
LLC Toshiya Hari - Goldman Sachs & Co. LLC Blayne Curtis - Barclays Capital, Inc.
John William Pitzer - Credit Suisse Securities (USA) LLC Christopher Brett Danely - Citigroup Global Markets, Inc. Chris Caso - Raymond James & Associates, Inc.
C.J. Muse - Evercore ISI David Haberle - Susquehanna Financial Group LLLP Jeremy Kwan - Stifel, Nicolaus & Co., Inc.
Operator
Good day, ladies and gentlemen, and welcome to the Maxim Integrated Fourth Quarter of Fiscal 2018 Conference Call. I would now like to introduce your host for today's program, Kathy Ta, Vice President, Investor Relations.
Please go ahead, Kathy.
Kathy Ta - Maxim Integrated Products, Inc.
Thank you, Latiff. Welcome, everyone, to Maxim Integrated's fiscal fourth quarter 2018 earnings conference call.
Joining me on the call today are Chief Executive Officer, Tunç Doluca; and Chief Financial Officer Bruce Kiddoo. I would like to highlight that we have posted a supplemental financial presentation to our external Investor Relations website.
The information in this presentation accompanies the financial disclosures in our earnings press release and on this conference call. During today's call we will be making some forward-looking statements.
In light of the Private Securities Litigation Reform Act, I'd like to remind you that these statements must be considered in conjunction with the cautionary warnings that appear in our SEC filings. Investors are cautioned that all forward-looking statements in this call involve risks and uncertainty, and that future events may differ materially from the statements made.
For additional information, please refer to the company's Securities and Exchange Commission filings which are posted on our website. Now I'll turn the call over to Tunç.
Tunç Doluca - Maxim Integrated Products, Inc.
Thank you, Kathy. Good afternoon to all our participants, and thank you for joining us today.
We appreciate your interest in Maxim Integrated. We are pleased with our June quarter results.
Our power management franchise in Automotive and Industrial is producing sustainable and profitable growth. Our growing free cash flow enables us to announce a 10% in our dividend today, delivering long-term value to our shareholders.
Let me next turn to this quarter's results. Compared to the same quarter last year, revenue grew strongly driven by Automotive, Industrial and Data Center, with continued solid profitability.
I would like to remind investors that June quarter last year included the transition of DigiKey to the sell-in accounting. During my market revenue commentary, I will exclude this factor.
First, I will comment on Automotive. In the June quarter, our Automotive business was up 20% from the same quarter last year.
We continued to see strong demand in Automotive power products for infotainment systems, battery management systems for electric vehicles, and driver assistance content. Our expertise in Automotive Safety Integrity Levels, also known as ASIL, is a key competitive advantage in our power and battery management products.
As I mentioned last quarter, these safety levels address potential hazards that can occur when electrical systems in cars malfunction. Maxim's battery management system and power management products for Automotive lead the industry in ASIL performance.
In the quarter, we announced several new products to address the specific power management requirements of driver assistance applications, such as collision avoidance, navigation, adaptive cruise control, lane sensoring, lane departure warning, and vision cameras. Power management comprises over half of Maxim's dollar content opportunities in driver assistance applications.
Turning to the September quarter, we expect Automotive to be flat sequentially, in line with seasonality and up in the high teens from the same quarter last year. We expect strength from content growth in infotainment, battery management systems, and driver assistance.
Let me next turn to the Industrial market. In the June quarter, Industrial was strongly up 13% from the same quarter last year after normalizing for sell-in accounting in last year's baseline.
Our growth in Industrial was led by overall strong distribution resales in the broad market, by factory automation content, and in medical products. In our broad market business, we continue to grow resales through our distribution partners.
In the quarter, we added a new distribution partner in Asia as we extend our global customer reach, particularly to small and medium business customers. In the June quarter, distribution channel resales grew 17% from the same period last year.
This is healthy double-digit growth from a strong 2017 June quarter. In factory automation, Maxim and customers that are enabling intelligence at the edge of the factory network.
We are in the early days of the deployment of Industry 4.0 control systems in factories around the world, and this movement has a few more decades before the market saturates. Maxim has content in controllers, sensors and a nascent opportunity in robots.
As controllers and sensors become more complex, the engineering requirements grow and our content opportunity grows as well. We estimate that Maxim's content opportunities in controllers can double, and sensor content can grow by 50% with the implementation of a modern Industry 4.0 factory architecture.
In medical, we continue to see double-digit year-over-year growth from a small revenue base in authentication and ultrasound products. Our authentication products ensure that genuine medical consumables are used with clinical equipment.
We expect continued growth for this business over the coming quarters. In the September quarter, we expect Industrial to be down sequentially, in line with seasonality and up in the mid-teens again compared to the same period last year.
This performance is expected to be led by factory automation products and through our strategy to reach small and medium business customers with distribution partners. Let me next discuss Communications and Data Center.
In the June quarter, Comms and Data Center was up sequentially, with strong growth in 100G optical products for the Data Center. In the September quarter, we anticipate Comms and Data Center revenue to be flat sequentially and up strongly from the same period last year.
Our year-over-year growth is expected to be driven by deployments of 100G optical products for high speed rack-to-rack connectivity within data centers. Finally, let me turn to Consumer.
Consumer was strongly down sequentially in the June quarter as expected, and was modestly up from the same period a year ago. Diversification in tablets, wearables, gaming, and a broad set of consumer products enabled our growth from the same quarter last year.
We continue to execute on a broad market strategy with small, medium business customers in the Consumer market. In the quarter, we announced fuel gauge products that provide industry-leading accuracy in battery management for a range of applications, including handheld gaming systems, smart home devices and USB Type-C portable devices.
Looking forward to the September quarter, we expect Consumer to be strongly up sequentially and flat from the same quarter last year through diversification in tablets and gaming. Smartphones are expected to be flat sequentially.
To summarize, current business conditions are good, and we have built Maxim to be successful in any environment. One, we're growing in high-quality, diversified markets such as Automotive and Industrial.
Two, our flexible manufacturing structure ensures consistent world-class gross margins. Three, we continue to exert tight spending controls.
And four, we have low capital intensity in manufacturing. All of this is driving strong and predictable cash flows.
Maxim priorities are to grow revenue, maximize profitability with continued financial stability, and we are certainly delivering on all three. With that, I'll now turn the call over to you, Bruce.
Bruce E. Kiddoo - Maxim Integrated Products, Inc.
Thanks, Tunç. Revenue for Q4 was $633 million, up 5% from the same quarter a year ago or up 9% after adjusting for the sell-in accounting transition in Q4 2017.
Our revenue mix by major markets in Q4 was approximately 30% from Industrial, 24% Consumer, 22% Automotive, 20% Comm and Data Center, and 4% Computing. Our Industrial and Automotive businesses comprised over 50% of our revenue in the quarter.
Let me now turn to the distribution channel. Distribution comprised 51% of Maxim's revenue in the June quarter.
We ended Q4 with 60 days of inventory in the distribution channel, within our target range of 55 to 60 days. Our delivery lead times are still five to seven weeks and have been in this range for over six years.
We continue to closely manage our supply chain and our distributors' performance given the uncertainties in the industry. Turning to the P&L, Maxim's gross margin, excluding special items, was 68%, up from the prior quarter with the increase driven by ongoing tailwinds and a few onetime items.
Operating expenses, excluding special items, were $195 million, down slightly from the prior quarter, reflecting continued cost controls. Q4 GAAP operating income, excluding special items, was $236 million.
Operating margin at 37.2% of revenue is up from the prior quarter and up 140 basis points from the same quarter a year ago. Q4 GAAP tax rate, excluding special items, was 12%.
GAAP earnings per share, excluding special items, was $0.73, up 17% from the same quarter a year ago. For the full fiscal year 2018, EPS grew 28% year over year.
Turning to the balance sheet and cash flow. Overall, total cash, cash equivalents and short-term investments decreased by $98 million in the fourth quarter to $2.63 billion.
Q4 inventory days ended at 127, up 10 days from Q3. Inventory dollars were up 3% from the prior quarter.
Capital expenditures were $12 million in the quarter. Trailing 12-month free cash flow was $932 million or 38% of revenue, which is up 29% over the same quarter last year.
Free cash flow excludes a onetime tax payment of $178 million related to a preliminary understanding with the IRS. Our free cash flow yield is 5.6% at yesterday's closing stock price.
Our free cash flow per share was $3.28, above our original target of $3 per share, and well on our way to our current target of $3.50 per share. For capital return, share repurchases totaled $128 million in Q4 as we bought back approximately 2.2 million shares.
Dividends totaled $117 million in the quarter or $0.42 per share. As Tunç mentioned, our board has approved a 10% increase in the dividend, which will be paid in Q1 2019.
Based on the increase in the dividend and yesterday's closing stock price, our dividend yield is just over 3%. Our increase in the dividend, plus share repurchases, reflect our return of capital commitment of 100% of free cash flow.
Moving on to guidance, our beginning Q1 backlog was $441 million. Based on this beginning backlog and expected turns, we forecast Q1 revenue of $615 million to $655 million.
Q1 revenue is expected to be up approximately 10% at the midpoint of our guidance compared to the same quarter last year, driven by double-digit growth in Automotive and Industrial. Q1 gross margin, excluding special items, is forecasted at $66.5 to 68.5%, down slightly due to the onetime items in the prior quarter.
Q1 operating expenses, excluding special items, are expected to be in the mid 190s, flat with Q4 despite the impact of our annual merit increase in September due to continued tight cost controls. Our tax rate for Q1, excluding special items, is expected to be 9% to 10%, down from Q4 due to tax reform and the preliminary understanding with the IRS.
For Q1, GAAP earnings per share, excluding special items, we expect a range of $0.72 to $0.78. For FY 2019, we expect capital expenditures to be at the high end of our targeted range of 1% to 3% of revenue as we perform required maintenance and add capacity to our only remaining internal fab.
In summary, we expect significant growth in Q1 revenue compared to the same quarter last year led by growth in Automotive and Industrial. Our financial model is a hallmark of high quality companies delivering strong earnings and free cash flow growth, 100% of which we are returning to shareholders.
With that, I'll turn the call back over to Kathy.
Kathy Ta - Maxim Integrated Products, Inc.
Thanks, Bruce. That concludes our prepared remarks, and we will now open the call for questions.
We'd like to continue the same Q&A process that we have used previously. We'll take one question from each caller so we can get to more people in the queue.
If you have more than one question, please hop back into the queue. Latiff, could we please have our first question?
Operator
Yes, ma'am. Our first question comes from the line of Harlan Sur of JPMorgan.
Your line is open.
Harlan Sur - JPMorgan Securities LLC
Good afternoon, and great job on the quarterly execution and strong free cash flow generation. Great job on the gross margin expansion and the move towards the upper end of your target of 70%.
I think you guys beat the June quarter guidance by 100 basis points at the midpoint, and it looks like your September quarter outlook shows sustainability of those margins. I remember at our investor conference back in May, you guys articulated some near-term initiatives you were focused on to drive gross margins, and namely that was improving the utilizations of your internal Oregon fab which has a lower cost profile, and moving more products into that fab.
Is that what drove the margin expansion or part of the margin expansion? And maybe if you can just articulate some of the other initiatives both near-term and longer term.
Bruce E. Kiddoo - Maxim Integrated Products, Inc.
Yeah, hi, Harlan. Thanks for the question.
Your memory is good. When we did talk about the tailwinds, one of them was the increased utilization of our remaining fab up in Oregon.
We also talked about flexible boundary capacity and our ability to move wafers around to kind of optimize cost on that. Of course, depreciation will continue to come down towards CapEx.
Depreciation was $23 million in the quarter and CapEx was like $12 million, $13 million. And then we also talked about the growth in our SMB customer rates and sort of the growth in our – kind of the change in mix of our business.
And finally, the improving pricing environment. So when we look at Q4, of those tailwinds, probably the most pronounced was this improvement in our distri business.
It was over 51% of revenue, right? So that continues to grow, and we know that's a high margin business.
In addition, Industrial was 30% of revenue. I didn't check it, but I think since my time has been here, that's close to a high-water mark for Industrial.
So again – so I think that strategy of going for high-quality businesses and going for SME is also adding to that gross margin. So I think, going forward, every quarter you're not going to have all of those tailwinds help.
I think, in this case, it was the SMB and the push into Industrial and Automotive. I think we'll continue to see those tailwinds help us continue to grow our gross margin over time, including that whole list.
I will say that there were some, a few onetime items that helped us a little bit in Q4. And so that's why we guided Q1, the September quarter, down a little bit.
We only guide in kind of 50 bps increments, and so kind of the midpoint of our guidance came out to about 67.5%. We'll probably do a little bit better than that, but it will be down.
We are expecting to be down a little bit just because of some of those onetime items. But overall, I think just the continued movement up of gross margin, and as we've always said it won't happen in some big chunk, it's just going to be nice incremental tailwinds over multiple years to really drive to the upper end of that 67% to 70% range.
Harlan Sur - JPMorgan Securities LLC
Great. Thanks for the insights.
Bruce E. Kiddoo - Maxim Integrated Products, Inc.
Yes.
Kathy Ta - Maxim Integrated Products, Inc.
Thanks, Harlan.
Operator
Thank you. Our next question comes from the line of Ross Seymore of Deutsche Bank.
Your question, please.
Ross C. Seymore - Deutsche Bank Securities, Inc.
Hey, guys. Thanks for letting me ask a question.
You guys are doing great on the Industrial and Automotive sides. I don't think that should be a surprise to anyone anymore.
But the Consumer side, I know it's volatile given what your handset – your primary handset customer does. But the guidance going forward is a bit stronger than I would have expected.
Tunç, you mentioned a couple of product areas, but can you just go into a little more specifics on what's driving that upside? And then as you look longer term, how important is that Consumer business to your strategy overall?
Tunç Doluca - Maxim Integrated Products, Inc.
Sure. So what's really happened a couple of years back, we really decided that we had to broaden this business, to find new customers in addition to the ones we had, and to find new applications where our products could go.
And basically, we've been executing on that strategy. And as a result, we've had a lot of product areas where we can sell our parts outside of smartphones – in addition to smartphones.
These are products like gaming systems, they're wearables, they're hearables. I think we talked a lot about those also in the past.
So all of those other non-smartphone applications we've made products for are basically paying dividends now. And as you saw, we're able to have – despite the strong headwind because of the early ramp from our major customer, year-over-year we did pretty well in that space.
So in the long-term, we're going to continue to look for applications where we can have sustainable differentiation and we can command the type of margins that we can. And when we found those applications, we will invest in those.
But in the long-term, one of your questions is what do you expect for growth. We're really not counting on much of a growth in the Consumer space.
So I think future growth is still going to be mostly coming from Automotive and Industrial, as you mentioned, with the Data Center, cloud data center, being the third, and very modest growth in Consumer.
Ross C. Seymore - Deutsche Bank Securities, Inc.
Thank you.
Kathy Ta - Maxim Integrated Products, Inc.
Thanks, Ross.
Operator
Thank you. Our next question comes from Ambrish Srivastava of BMO of Montreal.
Your line is open.
Ambrish Srivastava - BMO Capital Markets (United States)
Hi. Thank you very much.
Pretty solid execution, guys. I had a question on the – if you could just help us understand the business conditions.
And you mentioned some of the cyclical indicators, lead times and channel inventory. But maybe just provide us with some perspective on what are you seeing overall versus a year ago.
And I know, Bruce, last quarter you had addressed – you had gone out of your way to address a concern about double ordering. So anything on those lines on the cyclicals would be great.
Thank you.
Tunç Doluca - Maxim Integrated Products, Inc.
So I think that – we thought that this question would come up, so I think in my prepared remarks, I basically said that the business conditions are good, and we look at multiple things to understand this. We explained some of that in the last call as well, so I'll repeat those.
We do look at the ordering patterns of our customers and our ability to meet those orders. That's usually the first thing that triggers customers getting concerned and placing extra orders on you, let's say.
So in Maxim's case – we're aware that there's a lot of shortages of other components. But in Maxim's case, our customer order lead times, the lead time at which they order from us, has really not changed appreciably.
That's number one. Number two is our ability to respond and deliver to their orders has not changed for us and has been in this five to seven-week range for five to six years.
So we don't see any reason for them to change the way they order from the company. We also look at other indicators.
We look at cancellations, order cancellations is an indicator. We look at push-outs of orders, that's another indicator.
So when we look at all these, we're seeing things to be normal, and we're happy to see the fact that the business conditions are good and we're growing the broad-based business for the company. So those comments that we made also last quarter, none of those have changed this quarter.
So it looks the same way.
Ambrish Srivastava - BMO Capital Markets (United States)
Thank you very much.
Tunç Doluca - Maxim Integrated Products, Inc.
You're welcome.
Kathy Ta - Maxim Integrated Products, Inc.
Thank you, Ambrish.
Operator
Thank you. Our next question comes from the line of Craig Hettenbach of Morgan Stanley.
Your line is open.
Sarah H. Linden - Morgan Stanley & Co. LLC
Hi. Thank you.
This is Sarah Linden on for Craig. Thanks for the question.
I just wanted to ask if you could speak a bit to any technology updates on the BMS front and just where you're seeing the trajectory in growth in terms of geographies for EVs and the BMS products.
Tunç Doluca - Maxim Integrated Products, Inc.
Sure. So, the BMS product line for us has been doing really well.
We actually – we're happy to see that we're getting a lot of design wins, continuing to get a lot of design wins. We've got design wins at 28 OEMs and counting, and we have now over 80 models.
I think we said 70 in the last call or the call before that. We have more models now where we have design wins.
A lot of the business is showing up in our China accounts, but the recent wins have been in other regions as well, both in Europe and in the U.S. And we're shipping really to every geographic region.
So, it's pretty broad-based. The China EV demand can be lumpy, but the opportunity is real given the air quality issues that we all hear about in China.
We do expect the market is growing at least two times faster than the rest of automotive, which is good and healthy. We look at our numbers on a year-over-year basis; we've almost doubled this business year-over-year.
So, conditions are very good. And the reason it looks like we're winning in these customers is that same thing I talked about in my prepared remarks, they really like our ASIL D, which is a safety spec that we talked about specification in a single part.
They don't have to build the whole system for safety. Our part does it on its own, they like that.
And as a result, they design our products in.
Sarah H. Linden - Morgan Stanley & Co. LLC
Great. That's helpful.
Thank you. And then just looking at kind of like your third dividend increase in the past year, how are you thinking about the balance between buybacks and dividends moving forward?
Bruce E. Kiddoo - Maxim Integrated Products, Inc.
Yeah, so this is Bruce. I'll take that.
So, I think, overall, when we think about our return of capital policy, we return about 100%. Our commitment is to return 100% of free cash flow to shareholders.
When we think about the split between the two, it really kind of starts with the dividend, and we look at that on a free cash flow payout ratio. And we generally try to target about 50% payout ratio on the dividend, and with the idea being that we always want to make sure that if there is some type of global cycle, that no matter what happens to our business, that dividend will be safe.
I think the good news is, and what gives us confidence, is not only is our business doing very well, but the company is structured to do very well in any type of environment. And so when we think about that, obviously, we're growing in these kind of high-quality diversified markets, Automotive, Industrial.
Since the last recession, we've shifted our manufacturing strategy, where back in 2008, I think, we were like 85%, 90% in-house, now we're only 25% in-house. So, we have a much better variable cost structure.
Obviously, we continue to manage our spending tightly. CapEx is within a very narrow range of 1% to 3%.
And so, all of that drives these very strong cash flows and very consistent cash flows. And so, because of that, management and the board is confident in increasing the dividend.
I would say the other thing is, normally, we do it at this timeframe. We did do an increase in January, because that was because of tax reform, and we got access to all of our international cash.
So, that further gave us – so at that time, we increased the dividend 17%, and then now we're increasing another 10%. Again, based on kind of the strength of the business, sort of the model we built that we think can be successful in any environment, and the availability of 100% of our cash.
And so, those are the factors that have really kind of – our thinking for how we think of the dividend and overall return of capital.
Sarah H. Linden - Morgan Stanley & Co. LLC
Got it. Thank you.
Kathy Ta - Maxim Integrated Products, Inc.
Thank you, Sarah. Thanks, Sarah.
Operator
Thank you. Our next question comes from Toshiya Hari of Goldman Sachs.
Your question, please.
Toshiya Hari - Goldman Sachs & Co. LLC
Yeah, great. Thanks so much, and congrats on the strong results.
Your infotainment business within Automotive, last time I checked in, I think it was about two-thirds of your business. Your Automotive business continues to grow at a very nice clip.
I think your peers tied to infotainment are growing at a much slower rate. So just curious, what's driving the outperformance there?
Is it more a function of things like BMS outside of infotainment driving the overall growth in Automotive? Or are there specific things to your infotainment business that's driving the upside?
Tunç Doluca - Maxim Integrated Products, Inc.
Yeah, so your numbers are about right. So infotainment is roughly a little bit less than two-thirds of our Automotive business now, and it continues to grow in the low double digits.
And I think that, obviously, the other two you mentioned, BMS and ADAS, those products are in hypergrowth, and they're from a smaller base, so that's more understandable. Actually, I'm not aware of what everybody else is reporting for infotainment, but – I mean, if you're saying that we're growing faster, that's good.
It means our products are better. I don't really have a much better explanation.
The thing that we – one reason that I can speculate about was our ASIL capabilities, I think, in some of these products which are important. And our revenue in infotainment comes mostly from power, and I don't – I'm not sure what the makeup is for these other companies that are reporting in infotainment.
And I think the power needs might be growing faster than other functions or other systems in infotainment. So those are kind of speculative guesses.
I really don't have the exact data to support that, but that would be my estimation.
Toshiya Hari - Goldman Sachs & Co. LLC
Thank you.
Kathy Ta - Maxim Integrated Products, Inc.
Thanks, Toshiya.
Operator
Thank you. Our next question comes from Blayne Curtis of Barclays.
Your line is open.
Blayne Curtis - Barclays Capital, Inc.
Hey, thanks for taking my question, and I'll echo the congrats. Just want to ask on the Comm bucket.
100G has been a big driver for you sequentially last several quarters, the flat guide. I'm just kind of curious your outlook for 100G into the back half of the calendar year.
Is there any offsets in Comm? There's definitely been some commentary about 100G being strong for at least one hyperscale guy.
And then just, Bruce, quickly on the tax rate. I want to understand, Is that for the fiscal year or just this quarter, the lower rate?
Tunç Doluca - Maxim Integrated Products, Inc.
Yeah, so I'll quickly answer the 100G. So, we're doing well in 100G.
As we've said in earlier calls, our strength is mostly in the laser driver side of the Data Center 100G business. From a year-over-year basis, I think we continue to see growth in fiscal year 2019 compared to 2018.
And the visibilities right now is that far. Obviously, we're working on the next-generation products, but I think for the next couple of years, maybe three years, most of it will be coming from 100G products.
And we've got wins that span multiple cloud customers, so I don't know – your comment was from which one. But I think when you see 100G intra-data center growth, we're most likely either involved in that design win or in that business.
Bruce E. Kiddoo - Maxim Integrated Products, Inc.
Yeah, and then, Blayne, from a tax rate point of view, the – we did say 9% to – guided 9% to 10% for Q1, but that's also a good number to use for the full fiscal year. Obviously, we continue to understand the rules.
They're not all – all the rules aren't final yet, and so we continue to work on that. But from understanding what the opportunities are as a result of tax reform, we're able to manage the business such that we're comfortable with this 9% to 10% number for FY 2019, and it's obviously something we continue to study and to work on in order to minimize that number.
Blayne Curtis - Barclays Capital, Inc.
Thanks, guys.
Bruce E. Kiddoo - Maxim Integrated Products, Inc.
Yes.
Kathy Ta - Maxim Integrated Products, Inc.
Thanks, Blayne.
Operator
Our next question comes from John Pitzer of Credit Suisse. Your line is open.
John William Pitzer - Credit Suisse Securities (USA) LLC
Yeah, good afternoon, guys. Tunç, congratulations on the consistent and solid results.
I want to talk a little bit about the Industrial. Clearly, you guys are doing well there.
I think this is the first time it's been 30% of the revenue in the June quarter, and you're still kind of guiding for strong growth in September. You have – Kathy a while back was kind enough to kind of help educate us a little bit more on the factory automation sub-bucket of Industrial, and we're all trying to get a little bit more intelligence on these, sort of, nontraditional supply chains.
There has been if you look, especially out of some of the Japanese factory automation companies, some more mixed data points. I'm curious if that's something that you're seeing in the business.
Is there content offset? Or is it just that other parts of Industrial are making up for kind of weaknesses?
How do I think about kind of factory automation growth for you guys from here?
Tunç Doluca - Maxim Integrated Products, Inc.
Well, first of all, from our vantage point and from talking to our customers, we believe that there is a secular growth in factory automation. What do I mean by that?
What I mean, really, is that there's increasing analog content in the basic functions in a factory, like controllers and sensors and, to some extent, in robotics. As intelligence moves to the edge of the factory – this was most of the presentation we gave a few months ago.
And we see a lot of upgrades, especially in China, for their factories and wherever precision manufacturing is needed around the world. So we have a lot of products that we designed, I would say, in the last five, six years for doing IO-Links, better isolation products, a lot of new generations of power management parts that are high voltage, which we didn't have before.
And as a result of all that, we're seeing a lot of success with this freshened-up product portfolio, and we're seeing that as the main driver of growth for us. So you mentioned there's something offsetting.
I'll be honest with you. I don't know what that is, and we're not aware of it at Maxim.
But all I can say is that I think this trend of improving the factory's productivities is going to be around for a long time. And in our presentation, we showed data that said that it's going to be decades, especially for China and other parts of the world.
So it really is a growth that's being driven by the fact that we've got these new, fresh product lines that are extremely suitable for Industry 4.0.
John William Pitzer - Credit Suisse Securities (USA) LLC
Helpful. If then – if I could sneak a quick one.
Bruce, you made some comments about ASPs improving. I'm wondering if that's a mix-driven ASP improvement for you, or are you actually starting to see some pricing power?
And can you help, kind of, elaborate a little bit more on that comment you made in your prepared comments?
Bruce E. Kiddoo - Maxim Integrated Products, Inc.
Yeah, I think that was a response to Harlan's question around the long-term tailwinds for gross margin. And absolutely, on a long-term basis, we think in an environment of consolidation, right, it does give some pricing power back to the chip companies, whether that's in – with our customers in the VPA negotiations, whether that's in kind of the negotiations with distributors.
And then, I think also as we shift to the kind of distribution and SMB markets, right, these are smaller customers, lower volumes. And generally, we have more pricing power with that customer set as well.
So I do think, overall, we've seen a favorable pricing environment, whether that's in some areas we've been, I would say, kind of managed on the long tail, be able to increase pricing and maybe with some of our larger customers, it's just smaller reductions from kind of in the annual price negotiation. So, it is definitely a tailwind.
It's not something that is easily quantified, but it's something we clearly see when we kind of look at our business year-over-year. We're able to see our product margins at kind of a constant standard cost either stable or slightly up, which is unusual in the past.
Again, those would normally come down over time.
John William Pitzer - Credit Suisse Securities (USA) LLC
Thanks, guys.
Bruce E. Kiddoo - Maxim Integrated Products, Inc.
Yes.
Kathy Ta - Maxim Integrated Products, Inc.
Thank you, John.
Operator
Our next question comes from Chris Danely of Citibank. Your line is open.
Christopher Brett Danely - Citigroup Global Markets, Inc.
Hey. Thanks, guys.
I forget who mentioned it on the call earlier, but you said there was a lot of shortages out there. Can you just maybe expand on that?
What's in shortage? Is it impacting your sales at all, and do you think this is going to get worse or get better?
Or when can we expect this to end?
Tunç Doluca - Maxim Integrated Products, Inc.
Well, we are reading, seeing reports of extended lead times and shortages of products from other suppliers. I hope I was clear that we're not having shortages at Maxim, and we haven't had for a long time.
I think our supply chain is right now a lot more robust and flexible than before. So there are shortages from what I have read of passive components like capacitors and resistors, and there's still some tightness in discrete components, like FETs and diodes, areas where you wouldn't think there would be shortages, because they're the easier products to produce, frankly, than a complicated chip.
But those are the ones that we have heard. Frankly, in our internal reviews, we're not hearing that that's limiting us from selling our products.
Obviously, a customer needs all of the BOM to be able to build something. But I've heard very few cases where somebody said they wanted to delay shipments of Maxim products because they couldn't get something else.
Either they're not bubbling to me or they're not severe enough for us to deal with. So, we have really not heard that as a reason in our forecast reviews or internal reviews of the business.
Christopher Brett Danely - Citigroup Global Markets, Inc.
Okay. Thanks a lot, Tunç.
Tunç Doluca - Maxim Integrated Products, Inc.
You're welcome.
Kathy Ta - Maxim Integrated Products, Inc.
Thanks, Chris.
Operator
Our next question comes from Chris Caso of Raymond James. Your question, please.
Chris Caso - Raymond James & Associates, Inc.
Yes. Thank you.
Good afternoon. Just a question with regard to the distribution segment now 51% of revenue.
Bruce, you talked about Industrial setting a new record. I guess the question is how long do you think that continue that distribution can grow faster than the average?
How much more penetration can you get into the distribution channel that benefits both revenue and margin growth?
Bruce E. Kiddoo - Maxim Integrated Products, Inc.
Yeah, I mean, it's hard to predict that. We don't have a specific target for distribution as a percent of overall revenue.
Obviously, we push on the company to sell through both our direct business and through distribution. And so, we do expect both to kind of grow at healthy rates.
And if you think of some of our businesses, like a lot of Automotive or the Data Center, a lot of those businesses are direct, whereas a lot of the Industrial does go through distribution. So, we push on both channels.
When we do look at some of our peers, if we look at their kind of distribution business, it can get up to 60% of revenue. So, I do think there's some continued room, and we're continuing – as Tunç mentioned, we added a new distribution partner in Asia.
We continue to look for new partners around kind of the catalog-type suppliers and really selling into those really small accounts. We're also spending a lot of effort, and one of the key initiatives for the company is really around digital marketing and how do we sell kind of an unassisted design win, and whether that's just having better collateral on our website as far as application notes or simulation models, all of the items that allow someone to find our part, pick our part, design it in with limited or no support.
Of course there's still going to be a very important role for our sales and application engineers to go help those customers. But the more we can help them get started on a process, the better.
And so, those are all big initiatives for us. So, we do expect to continue to grow that business.
I would expect it to go – continue to get – as a percent of revenue to grow a little bit faster. Where it ends up?
We don't have a specific target.
Chris Caso - Raymond James & Associates, Inc.
Great. Thank you.
Bruce E. Kiddoo - Maxim Integrated Products, Inc.
Yes.
Kathy Ta - Maxim Integrated Products, Inc.
Thanks, Chris.
Operator
Thank you. Our next question comes from C.J.
Muse of Evercore. Your question, please.
C.J. Muse - Evercore ISI
Yeah, good afternoon. Thank you for taking the question.
I guess, a question follow up on the Consumer side. I know only 24% of your business and now actually growing year-on-year, but curious now that you've added greater breadth to the customer mix there, can you talk about the kind of visibility and ability to predict business there now versus perhaps, say, one, two, three years ago?
And then, a quick housekeeping, your interest expense went to breakeven. Should we be modeling that going forward?
Thanks.
Tunç Doluca - Maxim Integrated Products, Inc.
So on the Consumer side, I don't think there's that big of a change in our ability to project it in the short term. I think longer-term projections are still not that easy to do in Consumer, because there are high-volume applications that can swing things around, even outside of smartphones.
So, that profile has gotten a little bit better because of our exposure being not as much as it used to be to our largest customer. But I'd still say that projecting growth or projecting revenue in Consumer one or two years out is still difficult compared to some of the other markets where design wins are pretty well known, the production ramps are pretty well known like Automotive.
And it's easy to add them all up to get to a number. So it's still – it's better than before, but it's still the least predictable in our markets.
Bruce E. Kiddoo - Maxim Integrated Products, Inc.
Yeah, C.J., just on your housekeeping question, absolutely we do expect that the OI&E line will probably be breakeven in Q1 and Q2. One thing to note just from a modeling point of view is we did have $500 million in bonds that come due in November.
Our current plan of record is to pay those off. So that will increase the – or lower the interest expense, and we are paying higher amounts on debt on that interest expense than we were earning on the cash on the balance sheet.
So actually when we get to the back half of the year, Q3, Q4, you can actually see that OI&E line turn favorable by $1 million to $2 million per quarter.
C.J. Muse - Evercore ISI
Great. Thank you.
Bruce E. Kiddoo - Maxim Integrated Products, Inc.
Yes.
Kathy Ta - Maxim Integrated Products, Inc.
Thanks, C.J.
Operator
Thank you. Our next question comes from Christopher Rolland of Susquehanna.
Your line is open.
David Haberle - Susquehanna Financial Group LLLP
Hi, guys. It's David Haberle on behalf of Chris Roland.
Congrats on the great execution once again. We wanted to ask you guys a question on power management in the Data Center.
One of your competitors was recently talking up the 12-volt to 48-volt transition on a recent conference call of theirs. Can you talk about whether you're beginning to see any inflection in 48-volt in the Data Center and what your outlook is for those products?
Tunç Doluca - Maxim Integrated Products, Inc.
So 48-volt distribution was one of the themes that we were going after for two or three years now, and we definitely have introduced our Gen 1 products which have some traction, and we're working on our Generation 2 products. In terms of market acceptance, I think there are more customers now interested in this distribution voltage standard, and we're certainly talking to them and showcasing our technologies.
I think in terms of revenue, it's hard to predict when the first ramps will begin of these products, but so far we have not been very successful in actually predicting that ramp. And therefore, I think what we plan to do is report it when it starts rather than trying to predict when it's going to start.
So that's our plan of record. Our products and technologies are obviously reviewed by our customers, and they do like our products and technology.
David Haberle - Susquehanna Financial Group LLLP
Thank you.
Tunç Doluca - Maxim Integrated Products, Inc.
You're welcome.
Kathy Ta - Maxim Integrated Products, Inc.
Thank you. Thanks, David.
Operator
Thank you. Our next question comes from the line of Jeremy Kwan of Stifel Nicolaus.
Your line is open.
Jeremy Kwan - Stifel, Nicolaus & Co., Inc.
Yes. Thank you.
Good afternoon. I just wanted to ask a follow-up question in terms of – you mentioned you're seeing kind of a more favorable pricing trends internally for your own products.
I was wondering if you're seeing anything change in terms of the foundry landscape as capacity is getting a little bit tighter and if there is any pressure on pricing on that front.
Tunç Doluca - Maxim Integrated Products, Inc.
Yeah, so we've – I'll be honest with you. I've read some of these reports, but in the technology nodes we are in and in our strategic foundries, which are different from reports you read, we're really not seeing neither capacity tightness or a resulting pricing pressure.
So it's not something that's really affecting us.
Jeremy Kwan - Stifel, Nicolaus & Co., Inc.
Great. Thank you.
Tunç Doluca - Maxim Integrated Products, Inc.
Right. You're welcome.
Kathy Ta - Maxim Integrated Products, Inc.
Thanks, Jeremy.
Operator
And I show no further questions in queue at this time.
Kathy Ta - Maxim Integrated Products, Inc.
Okay. Thank you, Latiff.
And with that, we will conclude today's conference call. Thank you for your participation and for your interest in Maxim.
Bruce E. Kiddoo - Maxim Integrated Products, Inc.
Thank you.
Tunç Doluca - Maxim Integrated Products, Inc.
Thank you.