Q3 2020 Earnings Call

Ladies.

And gentlemen, thank you for standing by welcome to the Maxim integrated third quarter fiscal 2020 conference call. At this time all participants are in listen only mode. After the speakers presentation, there will be a question and answer session.

That's good question during this session you'll need to press star one on your telephone as a reminder, today's program is being recorded I would now like to introduce your host for today's program you Happy talk Vice President Investor Relations. Please go ahead Kathy.

Thank you Jonathan.

Welcome everyone to Maxim Integrated's fiscal third quarter 2020, <unk> earnings conference call joining.

Joining me on the call today, our Chief Executive Officer change, WGS, and Chief Financial Officer, Brian White.

As part of our usual process, we have posted a supplemental financial presentation to our external investor Relations website <unk>.

The information in this presentation accompanies the financial disclosures in our earnings press release and on this conference call.

During today's call you go be making some forward looking statement invited the private Securities Litigation reform.

I'd like to remind you that these statements must be considered in conjunction with the cautionary warnings that appear in our actually see filings investors are cautioned that all forward looking statements in this call involve risks and uncertainty, including the impact yet the corona virus come down.

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 change.

Thank you Kathy good afternoon to all our participants.

We hope that you're safe guard in your hill during the current global crisis.

We appreciate you joining us today and your interest in Maxim integrated.

Let me first summarized last quarter's results.

Good morning quarter progressed, largely as we had expected apart from the last two weeks ago decor.

Given the growing concerns about cool with 19, we took precautionary measures to predict employees and work with social distancing mandates governments.

These measures impacted or many factory test operations in the Philippines.

However, due to solid execution by the global Maxim team.

Or March quarter financial results were within the range of our guidance.

We have a flexible supply chain it is geographically diverse and the global pandemic as a varying impact depending on location.

First of waste supply chain footprint in wafer fabs, both internal and at our foundry partners is currently operational without disruption.

It Assembly, we have flexibility in our supplier network to work through staffing related capacity constraints.

Our time and test operations are currently able to continue at full capacity.

However, our Philippine test operations aren't impacted by social distancing measures.

In the June quarter, we expect third just operations in the Philippines.

Ron at approximately 70%.

On the run rate.

Additionally, we are expediting product shipments were on medical customers to fight the pandemic.

And this has been factored into our tents planning.

Our internal and external manufacturing teams are doing great work in optimizing maxims operations during the crisis.

Let me turn into our fiscal Q3 in Q4 marketing.

Please note that our June quarter commentary by end market includes you effect or weren't Philippine test constraints on revenue shift mix.

I will start with automotive.

In the March quarter, or automotive business was up 5% sequentially with growth across all of our automotive applications, including infotainment.

Two body electronics, Vms and driver assistance systems.

Due to the impact to cope with 19, we expect the June quarter automotive demand will soften.

Our automotive customers have been significantly impacted by shelter in place mandates around the world in many customers have temporarily stopped producing cars.

We continue to believe into content growth opportunities in this market.

Continue to invest in power management.

Yes, and Dms for electric vehicles in anticipation of the returning to growth from these content rich applications.

Due to covert 19, OEM factory closures, resulting in lower demand.

Given our test constraints, we anticipate our automotive business will be strong, we don't greater than 20% decline sequentially.

We expect declines it all of our automotive markets with the lowest impact in our BMS business due to the resumption of demand a Chinese Oems.

Well be next turn to be industrial market.

In the March quarter industrial was flat in the prior quarter.

We saw a modest broad base declines, which were offset by an uptick in automatic test equipment.

Days of inventory in the channels remain similar to the prior quarter and were well below our target of 60 days.

The covert 19 related test operations disruption caused the sharp decline in shipments to distributors during the last two weeks of the quarter.

The result, we were not able to replenish channel inventory at the rate previously forecasted.

Ryan who will provide more detail on our distribution business right after that.

In the June quarter, you expect industry to be up sequentially, primarily driven by expedited medical products to help our customers meet its surge in demand.

Industrial is expected to be up from the same quarter last year.

Once again, we have the impact of artists constraints weighing on our guidance otherwise.

Longer growth could be achieved.

Let me next discuss communications and data center.

In the March quarter, Coms, and data center was up 3% sequentially.

We experienced strong growth in demand for 25, the optical products were base stations.

And one hundredg optical products for data center applications.

The ramp in optical products was partially offset by weakness in notebook computers and peripherals.

Our laser driver products are being rapidly deployed at Hyperscale data centers and Fiveg based the Chanel. Please.

Our products enable these links to move more data, while staying within limited power budgets.

Our optical business should benefit in future quarters, its employees around the world adjust to remote work.

We are starting to ramp shipments of new design wins in server power, we're leading Hyperscale data center customer.

We expect this ramp to be a tailwind for the business in future quarters.

In the June quarter, we anticipate comps in data center revenue to be up from the prior quarter.

Merely driven by increased demand for sure Repower and optical products for Hyperscale data centers.

As in data center is expected to be strongly up from the same quarter last year.

We expect probably an optical for data center.

And for in Fiveg base station applications to contribute to strong year on your growth.

[music].

Finally, let me turn to consumer.

In the March quarter consumer was down 5% sequentially.

With an uptick in smartphone related shipments more than offset by seasonal declines in other consumer electronics.

In the June quarter, we expect the consumer market to be very soft due to the coal would 19 epidemic impact on consumer spending and lower smartphone content.

Consumer is expected to be strongly down greater than 20% sequentially.

I would like to recognize maxims hardworking employees at our wafer fab in test manufacturing sites, our supply chain partner.

And our global employees, who are remaining productive as they work from their hopes.

I'm very proud of the resilience of this company as shown by our ability to navigate these unprecedented times.

We remain highly profitable due to our well diversified business model and outstanding product portfolio.

We are maintaining our focus on long live.

High performance analog and mixed signal products, which will deliver value to our customers and drive sustainable growth for maximum the long term.

Now I'll turn the call over to Brian.

Thanks students.

I hope it all of you listening or stayed say thank you for joining the call today.

It's changed mentioned, we are working diligently to prioritize the safety of our employees.

Well in Sri business continuity in this challenging environment.

I'm proud of the work that we're doing to keep our operations running as efficiently as possible.

Just supplier customers with critical products.

Revenues for fiscal Q3 was $562 million.

Up 2% sequentially and up 4% from the same quarter a year.

Our revenue mix by major markets in Q3 was approximately 30% industrial.

28% automotive.

24% Carlson data center and 18% consumer.

Now I'll turn to the distribution channel.

Distribution comprised 52% Knox's revenue Q3.

We ended the quarter, what's just 50 days a channel inventory.

Up one day from the prior quarter.

Well below our long term target 60 days.

As change mentioned, our manufacturing test operations.

We're not able to run at full capacity during the last two weeks of the quarter.

Impacting our ability to ship products, both to direct customers and to distribution.

Additionally, distribution resell increased from the prior quarter.

Turning to the piano.

That's that's gross margin excluding special items was 66.1%.

This was down 10 basis points from the prior quarter.

40 basis points below the midpoint of our guidance.

Gross margin was slightly below our guidance midpoint due to cobot 19 disruptions to our manufactured operations in the last two weeks in a quarter.

Operating expenses, excluding special items were $181 million.

Down approximately 7 million from the prior quarter.

Reflecting lower controllable expenses.

A portion of this decrease was discretionary travel.

Which we intend to resume when safe for employees and customers.

Q3, GAAP operating income excluding special items.

It was $191 billion.

Operating margin was 34% of revenue.

210 basis points from the prior quarter.

Due to higher revenue and lower operating expenses.

The Q3 GAAP tax rate, excluding special items was 12%.

Down one percentage point from the prior quarter.

GAAP earnings per share, excluding special items like 61 cents.

Equal to the midpoint of our prior guidance range.

Now turning to the balance sheet in cash flow.

Total cash cash equivalents and short term investments.

Were $1.7 billion.

Yes, $97 million from the prior quarter.

Trailing 12 month free cash flow defined as cash from operations less capital expenditures.

$744 million.

34% of revenue.

Free cash flow per share was $2.74.

And our free cash flow yield, 5% at Yesterdays closing stock price.

For capital return share repurchases totaled $157 billion in Q3.

As we bought back approximately 2.8 million shares.

This was an increase of 49 million.

Or 45% from the prior quarter.

Our share repurchases accelerated in Q3.

Given by our repurchase matrix, which fives back more shares at lower share prices.

Wind with increased free cash flow.

Dividends totaled $129 million quarter.

Based on Yesterdays closing stock price and our quarterly dividend 48 cents per share.

Our dividend yield is 3.5%.

Total return of cash through dividends and share repurchases.

It was 131% of free cash flow on a trailing 12 month basis.

We are on track to exceed our commitment to shareholders.

Returning to reach 125% of free cash flow.

Fiscal 2020.

Q3 inventory days ended up 106.

John three days from Q2.

Inventory dollars were down 1% per quarter.

Capital expenditures were 17 million.

Now I'll turn to our outlook for the June quarter.

We forecast fiscal Q4 revenues to be between 480 $540 billion.

Down 9% from the prior quarter.

Down 8% year over year at the midpoint.

Our beginning fiscal Q4 backlog was $509 million.

Almost equal to the midpoint of our revenue guidance range.

On the surface. This would imply that turns would not be required to achieve our revenue forecast.

However, we anticipate some level pushouts what's in backlog.

And we expected our ability to satisfy orders will be impacted by coated 19 related constraints in our Philippine test operations.

Limiting our revenue outlook to the range provided.

Fiscal Q4 gross margin excluding special items is forecasted at 65.5%.

67.5%.

Okay 40 basis points at the midpoint from the prior quarter.

Lets favorable product mix and front end factory loading more than offsetting lower revenue.

During the quarter, we we plan to increase our internal inventory ahead of test.

To accelerate our ability to ship finished products as test capacity becomes available.

Fiscal Q4 operating expenses, excluding special items.

Our expected to be down approximately 1 million from Q3.

With continued cost controls and the benefit of lower travel expenses.

Fiscal Q4 capital expenditures are expected to be approximately 3% of revenue.

And our tax rate excluding special items.

As expected to remain flat to Q3.

At 12%.

Our fiscal Q4 GAAP earnings per share excluding special items.

We expect a range at 43 to 57 cents.

In summary, our strong financial model and operational focus.

It's enabling maxim to be resilience in this challenging times.

We are focused on delivering critical products to our customers, while safeguarding employee health.

We continue to generate strong free cash flow.

And remain committed to our strategy to return more than 125% of that free cash flow to investors.

With that I'll turn the call back over to Kathy.

Thanks, Brian.

That concludes our prepared remarks, and we will now open the call for questions that you continued the same kuni process that we've used in previous calls well take one question from each caller. So we can get tree as many people as possible Jonathan could we please have your our first question.

Certainly our first question comes on line up Ross Seymore from Deutsche Bank. Your question. Please.

Hi, guys. Congrats on the solid results and then certain times I just wanted to dig a little bit deeper into the industrial side of things a little surprised that it's holding in as well as it did in March and I guess more impressively even in June to it you said your expediting medical there. So I guess in aggregate can you just talk about how much of that is.

And then how big is medical as a percent any more color around bath and when do you expect the Philippines test headwinds actually.

Go away. Thank you.

Alright, Ross so so in general just to begin to you know what percentage of ourselves as medical its somewhere well before cool with 19. It was somewhere in the mid single digits raise the company. So it gives you some idea.

In terms of what's happened during this quarter is really a surge in demand and customers wanting to pull in all kinds of our products. We have many products the cooling to medical.

But they are used a lot of them are used in ultrasound equipment and pulse oximeters and disposable patches remote patient monitoring and ventilators anesthesia machines, a lot of equipment could we actually didnt really follow where.

Our strong product portfolio was actually designed into so a lot of those customers, obviously came in and increase their orders both bookings and pull them. So essentially we're responding giving those customers priority to deliver products mm.

In terms of Ah you know the rest of the industrial market or you are seeing some effect Oh clearly we couldn't ship all that we needed to ship last quarter. So there's some catch up Oh, that's going on.

And in general industrial customers in previous.

Experiences we've had.

Our you know their reaction speed is not a very quick like like a consumer customer would be so I think that we're still seeing them continuing.

Business as usual as long as their factories are open and that's worth.

We don't have a lot of advanced information on like automotive in that space. So some of the group is fueled by these olin's and high priority would giving for medical.

Some of it is also by general demand kind of remaining stable frankly, not not going down.

Part.

Thank you.

Well thanks Ross.

Thank you aren't next question comes from a line of Harlan sur from JP Morgan Your question. Please.

Good afternoon. Thanks for taking my question and congrats on the strong free cash flow generation.

Maybe just a quick housekeeping question you guys talked about test capacity constraints in June maybe how much of their revenue impact how much of she recruiting impact is that having on the June quarter and then for my main question in automotive recent data points out of third party research guys like H S. In one of your semi peers there.

Reported this morning is that China auto sales have started to pick back up in addition to China auto production picking back up here in the June quarter.

Given your strong presence in BMS and recently in aid us would like to see if you guys. Just seen the same trend and then on the global basis light vehicle production is expected to inflect pretty strongly in the September quarter as European in U.S. and the Japan guys start to ramp production backed up are you starting to see this.

Reflected in your auto customers Ford forecast, just given that you are keeping relatively lean inventories would you anticipate your auto shipments to track closely with global production trends.

Okay Arlon I'll take that was that was a lot of questions.

So one thing, though like just recalled last asked the question. So two part question I Didnt answer the second part which is when do we expect our test constraints to get better.

Yeah, Let me answer that first.

We obviously the whole team is working to do changes in getting more operators to to get and working hard factory in the Philippines.

As well as shifting test to other facilities that we have so is 70% I talked about in my prepared remarks was kind of an average for the quarter Oh. So we're starting from a lower number and who will catch up by the ended the quarter.

So I think that in terms of these delayed shipments I think you'll be able to catch up with that in basically in our Q1. This is our current plan.

In terms of your questions about automotive we are seeing it mix actually from customers some of them.

The gun to order and you mentioned one of them, which was BMS customers in China, because their factories are coming back online.

Some of our customers are still in the condition of factories, you know either partially operating or completely closed there.

You know there they're not.

Essentially taking products from Maxim. So it's really is a mix it's going on in the automotive area.

And as I said, it's also limited by some of our test constraints. So I think automotive is a lot of things happening and ER and frankly any answer I give you would be correct for some segment.

In terms of demand coming back we're being delayed.

But I think in general.

The world.

In whole is built fewer cars because of the constraints. So that has to have an impact essentially on the amount of product that customers are going to take from us. It does depend on what their inventory levels are at their tier ones for example.

But we're doing our best in order to.

Really prioritize the ones that need the products more heavily than others.

But I think our general feeling is that there will be weakness.

In this this quarter and maybe even next.

Having said all that I think in long term, it's still a good market for us I mean, we'll continue to invest in it and the product lines that I mentioned in the prepared remarks.

So your other question was you know how much of your revenues test constraints versus demand.

It's hard for me to quantify that but I think I can.

Directionally give you some answers and maybe that will help.

Well first of all the impact is across each of our end markets in terms of the tests can treatment.

I think industrial market guidance would have been strongly up instead of just off if you were able to build all the products and ship them.

Well I think the consumer softness is primarily from demand weakness that we're seeing.

Not really affected that March by test constraints.

Automotive is both a it's both demand weakening entity that's countries with both of them.

And Compton data center was relatively unaffected by the country.

So I.

I think that.

It is it's kind of things are fluid. That's why we're we're kind of hesitate to give me actual numbers as to what revenue could have been or if we had over this country and because as Brian mentioned in his prepared remarks somewhat the backlog we have.

We're I'm suspecting that as the quarter goes on some of that might be pushed out of the quarter as well. So it's a bit of a mix for that reason.

Thanks for the insights punch.

You're welcome.

Thank you how big.

Thank you. Our next question comes from wind of Ambrish Srivastava from BMO. Your question. Please.

Hi, Thank you very much for taking my question. My other question on the other side and the.

Commentary around the turns and the backlog just help us personal perspective, but others that sharp.

Now towards me I've seen before and I don't know no two downturn for the same but in terms of state of cancellations.

Oh push outs that you're seeing just had to understand the.

It's kind of the shop reversal in fundamentals, we have seen and based on your order patterns. What are you seeing versus what you've seen in the past and also more importantly, NXP. This morning, with calling out for recovery Q over Q broken through Q, Kevin just help us understand how you're seeing this current downturn playing out thank you.

Sure. This is Brian I'll take that one.

If we start with turn.

A typical course routes would include about 35% the revenue.

Coming from turns within the quarter so clearly.

Any this quarter with backlog equal to the midpoint of our guidance is unusual.

But.

We've we've raised the guidance as we had again.

Given the current environment, where we do have some.

Supply constraint issues as well.

Yeah, the potential for Cmos might backlog, but 35% would have been kind of the historical norm.

As it relates to push outs and we are trying to.

Factored that into our guidance.

You know the the one thing I think is working in our favor here again, we have locked down.

45 days.

Commitment from our customers. So weve moved to practice, where orders within 45 days are non cancelable non reschedule.

So that that gives us.

A reasonable amount uncertainty as we move forward into quarter at least a little bit of exposure.

The tail ended the quarter.

Which is what we're trying to comps contemplated to be the guidance.

I think that it's.

Very difficult to compare to.

Prior downturns because.

We have you know supply dynamics here that are constrained that revenue.

Not necessarily just a decrease in demand.

The areas the softness in demand are you know particular pockets of strength another area.

But the supply side of things I think makes it non comparable to try to drop correlations to prior downturns.

Yes, so there's maybe a oh things to Ben.

Your first of all in terms of the shape of the recovery I think that was part of question as well as.

As Brian said, we have some amount of complication because of the supply issue, but in general industry really has never been face with a pandemic caused recession that came.

You know so so quickly.

And the effect on our industry I think will be different I think from the general industry.

We also saw this if you take the model of the 2009.

You know the great recession, even though the economy remains in recession for a long time semiconductors.

Really bounced back a within I remember within a year, we're already exceeded a great quarter over quarter numbers or within a year or five quarters. So.

What we're doing it says we can't really project that very well.

And then assuming that the shelter in place orders.

We remain in place for a short time, let's say a few more months it most.

And taking that all into account, we're preparing assuming there's a quick recovery. So in terms of our ability to ship.

Our supply chains on you know, we're really preparing for a quick recovery.

We are built to be resilience I mean, we're serving a the a high performance analog market belong with products Oh, the flexible manufacturing structure that we have today, we'll be able to respond to a record quick recovery.

Unlike the difficulties that we had in 2010, I mean, you might recall.

And we will continue to be careful on spending.

There is also important but we essentially are preparing so that we are ready.

For a quicker recovery of the semiconductor business compared to what might happen in the overall economy.

Okay. Thank you both for perspectives.

Well, thank you ambrish.

Thank you. Our next question comes from the line if it back Oh, Yeah from Bank of America. Your question. Please.

That click on for the back Thanks for telling me ask the question my questions also on the automotive end market.

So even with your softer June guide your auto business appears much more resilient compared with industry auto production, that's down 30% or selling the first half.

I guess I'm wondering how you're feeling about customer inventory, how did you do particularly and me a in the Odyssey thing.

Yeah, I'll take that one so we actually don't have really good insights into what customer inventories are they don't really share that with us we do ask the questions about inventory levels.

But the fact that in not maybe across the board, but on many of our newer products.

We were also limited by test countries told you that they don't have much inventory on the especially on our new and faster growing product lines.

So.

You know, it's hard to really put numbers on it but.

We do notice or that we're really performing very well in automotive compared to the overall.

Market and we're.

We are attributing some of that too.

Faster content growth in design wins in particular segments that were doing well and good examples of this or or Ada es or cereal when products are BMS products. These are all doing pretty well and are therefore, since we're getting more content in market share gains.

It would be reasonable to assume we're doing better than what we're seeing for the overall market.

Having said all that it is fine said, it's very hard for us to predict what's going to happen and therefore, we laid out or more cautious outlook on what's going to happen and automotive with it pretty serious decline that we're forecasting.

In the current accordingly.

Got it thanks.

Thank you Jamie.

Thank you. Our next question comes from a line of credit gotten back from Morgan Stanley. Your question. Please.

Yes. Thank you I just wanted to follow up on the commentary around inventory in the channel and you had mentioned in the March quarter at the expectation was you can at least kind of resale or get closer back to your targets and that didn't happen. So just how do you see things playing out for the June quarter, and any update on resales in that the month of April.

Sure, Brian I'll take that.

Yeah for the March quarter, we had built.

And assumption or guidance that we would replenished the channel to some extent moving a little bit more toward our targeted range there.

As it turned out shelling Tory remained essentially flat 50 days up just one day from the prior quarter.

That was driven by stronger resell so resells, we're up about 20 per quarter.

But he was also driven by the socket, we were constrained in our ability to ship products into the channel.

20 ended the quarter.

Your question about what's the what do we see mean moving into the trial for the June quarter as it relates to that.

Again, it's difficult even when.

There is less uncertainty.

The macro environment I think it was challenging for us too.

Forecast resellers with a tremendous amount of accuracy and it in today's environment, It's even more difficult and then is combined with the challenge of trying to.

Predict how our mix of shipments will ultimately.

Oh play out as a as it relates to direct versus change shipment. So.

You know I think what you've seen from us over the course several quarters is.

Very prudent management of our channel inventory.

Very discipline in managing that keeping it well within our target range you should expect us to continue to do that we will but I don't think it would it would be valuable threats to try to predict you know exactly where days of inventory the channel would likely fall in.

The June quarter, given the very sensors.

Hi, Thank you Craig.

Thank you. Our next question comes from a line of C.J. Muse from Evercore. Your question. Please.

Yeah. Good afternoon. Thank you for taking the question I guess another question on the testing Assembly side. So I guess could could you share with US is is it strictly cast also assembly is it really just related to social distancing or related to supply and logistics other issues like that.

And then as you think about you know in improvements there can you speak to any impact on margins in mid June quarter. Your vision for perhaps adding redundancies for 80 outside of Southeast Asia.

And you talked about backlogs potentially being pushed out related to test can you qualify what do you mean by that thank you.

Yeah. So so let me comment in general about manufacturing and.

Well, Brian can add if gross margin affects you can add to that so in terms of our supply chain just to give you a its overall summary, our wafer fabs our own wafer fabs and our foundry partner network is in good shape. So we're not seeing.

Any disruptions there.

Our assembly is almost a 100% or outsourced into multiple vendors in multiple countries and even though there are a there. There's a couple of countries affected we've been able to shift around your we load because we had multiple sources for those pay.

Packages, So assembly in general we've been able to.

Take care of you about being affected by the social distancing measures.

And final test, we really have to internal sources and then some testers outsource obese the outsource is working fine.

Our Thailand operation was working fine in the Philippines, basically we're not running at 100% because we can't get all the employees or staff into the factories because.

Oh restrictions in the Philippines that we're mandates by the government. So our plan is really to increase the level of staffing.

And also as a result be able to increase our output from that factory.

And we expect unless.

You know we run into other issues or other restrictions by the government or we are protecting the employees.

We're making sure that are there in a safe environment with many measures and we do expect probably by the end of the quarter to get back to the level that money or do some catch up as well so.

It is really a a number of stuff that can get to the factory, it's not really related to equipment. So.

So hopefully that answered most of your questions was that.

The vision or is there any other detail you're looking for.

Yes, very helpful. If you're going to sit on the margin impact that would be great.

So Brian can you comment on that.

Yeah sure the for the June quarter were actually guiding gross margin up 40 basis points at the midpoint.

So we are getting fairly significant benefit in the June quarter associated with mix with.

Lower automotive and lower consumer pull on mix perspective.

That's providing.

Tailwinds on the gross margin and we will continue to run manufacturing operations.

Higher level, so, particularly Brian and.

We're going to continue to make sure we're going to build some inventory as I said in our prepared remarks.

So the front end, we'll continue to work will build some inventory in front of task.

Because we want it positioned for doubt bottleneck to be resolved. So once that bottleneck in the Philippines is is resolved and want to be it.

In a position push out finished good.

As quickly as possible and adjust the the backlog.

Thank you.

Thank you see Jay.

Thank you. Our next question comes from a line of John Pitzer from Credit Suisse. Your question. Please.

Good afternoon, guys can from asked the question.

Couple of things here first that's what can you quantify what the impact was in the March quarter from the test Assembly issues. What would you had been at the midpoint. So I can assume a two week issue was about a 12 million dollar hit and then tranche.

Kind of follow onto that I'm, just a little bit can just confused by the June guidance, you're heading in with very healthy backlog in a supply constrained environment.

Where inventory that we really believe.

Well I guess in June the quarter that customers actually try to build some cushion inventory and maybe the cancellations you're expecting are pushed out until September why why are you. So confident that June as the quarter to customers will start to cancel backlog and push things out.

Well I think you you used the word confident in there.

And you know, we're not that confident but I think that's what is the most likely thing to happen each of the way we construct our guidance for the quarter.

We did see.

You know in the first few weeks of April now.

You know before we put into that 45 days of backlog is locked commented Brian made we did allow customers to move their backlog around.

And we did notice that some of the automotive customers did push there or so we're we're suspecting that is in settle you know there might be more of those push out. So that's that's really why we're doing we're basing it on.

What the automotive customers how they behave.

In the first.

A few weeks of the core.

Whether that will continue or not is to be seen a we're not we're not really sure.

Your other question about last quarter, I think Brian can answer that.

Sure John Yeah, he disruption to.

The tests operations in Philippines at the end of the March quarter did have an impact on gross margin.

We were a 40 basis points shy at the midpoint and we were expected to be at midpoint to one for that impacts.

Brian I was more talking the midpoint of the Rep Guide would you have hit the midpoint of the of the Rev Guide without the testing issue.

Yeah, we were tracking to make the quarter at the midpoint.

Perfect. Thank you I think just Mr give you a bit or color on that when we reward tracking absolutely correct from Brian.

One way to look at it as we said.

How much that I've lateness of deliveries grow.

They grew about 20 30 million so.

I guess that shows you that we were tracking.

Perfect. Thank you.

You're welcome Thank you Josh.

Thank you. Our next question comes from the line that Mike Stevens from RBC capital markets. Your question. Please.

Hey, guys. Thanks for taking my question I, just wanted to focus a bit I'm, just kind of the supply versus demand dynamics. So you're talking about a pretty I noticed on a sequential decline due to their children 19 at that but how do you guys get comfortable on what is demand erosion in what interest supply constrained because it sounds like the supply issue really impacted march quarter by call.

10 to 15 million plus so how much of that supply issue re occurring in June and then secondly.

Do you believe that kind of consumer and automotive.

Automotive demand market it can be weaker in 2021 or do you think that's too early to kind of look out that far.

I think going out to 2021.

No we don't give guidance for from that long time.

I think that if the.

Staying placed orders now I'm talking about the economy more soon about Maxim, but if those orders are used in the coming months.

I personally would expect things to kind of recover.

But as I said, it's hard to see what all those implications are for Maxim, we really have or focus on a you know the long term in terms of our investments, especially in R&D.

And we have a pretty flexible supply chain should we should be able to react.

Whether there's a quick recovery in 21 or if there isn't.

Then because of the flick fixable chain, we don't have a huge.

So dependence on gross margin on the Liberal revenue. So I mean, we should be.

We're well prepared for any eventuality that occurs out there.

Got you and then how much of the supply impact in the Q2 God, we're trying to June quarter got.

Well with the backlog not as stable as we like it according to quarter, it's hard for us the project, but with us running on average.

With 70% or we do expect the late is in our deliveries to orders to actually grow.

In the June quarter.

But I'm not going to be able to quantify that.

Because I don't know that got into backlog stability.

Understood. Thank you.

Thank you match.

Thank you. Our next question comes on line toy spot back from Stifel. Your question. Please.

Oh, yes. Thank you I was hoping to zoom in a little bit on the the 45 day commitment a schedule.

First of all went when was that instituted and is this a if there's a new phenomenon and should we assume that this this is gonna be ongoing I'm just trying to understand.

If this is sort of a new policy that you have or if it's only now during this very uncertain era.

Yeah ill take that so it is.

Something we put in place I remember right within the first week or two of April.

And and it was done because we were there's limited wanted to make sure that backlog is the correct backlog that building because 45 days is enough time to make sure that we're loading but.

Correct products to assembly and loading them on our testers.

So we put it in place because of the current conditions and the the a test can constraints that we're looking through and it was I think I was under the first one first maybe 10 days of April.

And an internship is this sort of a onetime thing or should we expect is to be the norm going forward, because obviously that will change your backlog in terms ratio going forward right.

I wouldn't think it would change it because we usually come in with a pretty reasonable backlog a into beginning in the quarter I don't think it will change it whether we'll make the permanent or not I think it's too early to make that decision just see out things develop and.

Customers react.

We basically explained to customers why we're doing it and I'd say most of them from very reasonable.

Under these conditions and are they said they would follow our or direction on this and where are we didn't really talk about what was going after the long term frankly.

Sounds good thank attention.

You're welcome.

Thanks Terry.

Thank you.

Once again, ladies and gentlemen, if you have or if you have a question at this time. Please press Star then one.

Our next question comes down the line of Matt Ramsey from Cowen Your question. Please.

Yes, hi, there. This is Ethan potasnick on for Matt Ramsey I want to talk about the causing data center.

As you guys have previously described a business as lumpy and you touched on some of the growth drivers for the June quarter. So I was wondering if you could kind of parse these out and talk about some of the ebbs and flows between Hyperscale Capex, sometimes you activity.

For 25.

Gig and 100 gig optical products.

Are these trends sustainable heading into the back half the calendar year.

Any any color would be helpful.

Sure. So that's always is you summarized we have a nice robust.

Good growth business on the Hyperscale slide.

Ah that's consistent products, we make for.

Probably merely most of the growth there was coming from our optical products.

These customers are investing in a in their data centers and they need to connect and high speed connect their servers and storage together in our products helped do that inside the data since that's pretty robust growth.

And the signals, we're getting at the moment from them is that their investments are going to continue.

We this quarter or the addition was that we began to ramp some power products for these high powered server applications. So that also should help oh.

You know essentially our power products and enterprise and data center had been weak for multiple years and this is.

Initial ramp that we're seeing at least from that one customer. So that those two added should really help us brought to you know market. It seems like the world is continue to invest.

Which is a data center in CLO.

On the.

Based Asian side.

Robots are continuing and are you.

No single Lane 20, Fiveg transceiver products are well accepted in the market.

With that piece will be lumpy.

And.

And I think that we ramped up very nicely throughout last year.

There will be you a little bit of a decline probably this quarter, it's things kind of stabilize in that market, but I think there's no question in our minds that overall for the future.

The upgrading of a base stations are going to continue.

But that business you know has always been lumpy and we'll continue to be so so I wouldn't really directed to keep growing at the rate did it has grown to let's say in the last year.

Yeah.

Hi, Thank you you said.

Thank you and this does conclude the question and answer session of today's program like the hand, the program back to Kathee talked for any further remarks.

Okay. Thank you Jonathan.

That does conclude today's conference call. Thank you for participation and pre interest in Maxim.

Thank you, ladies and gentlemen through participation in today's conference. This does conclude the program you may now disconnect good day.

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