Q4 2019 Earnings Call

At this time all participants are in listen only mode. Later, we will conduct a question and answer session and instructions will be given at that time, if any which require operator assistance. During the program. Please press Star then zero on your Touchtone telephone as a reminder, taste program is being recorded I would now like to introduce your host for today's program Kathy.

Vice President Investor Relations. Please go ahead Kathy.

Thank you Jonathan.

Welcome everyone to Maxim Integrated's fiscal fourth quarter 2019 earnings conference call.

Joining me on the call today are Chief Executive Officer changed, Malaysia, and Chief Chief Financial Officer, Bruce could do.

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

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

During today's conference 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 LTAC 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 Companys 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 and thank you for joining us today.

We appreciate your interest in Maxim integrated.

Let me first summarize last quarter's results and our outlook.

Our June quarter results met our expectations, well reduce both internal and distribution channel inventory.

Given the soft environment, we will continue to tightly manage inventory and spending in the September quarter.

Today, we announced a 4% increase in our dividends, reflecting our continued commitment to return cash to shareholders and confidence in our long term outlook.

Let me now provide more detail on June results and current quarter outlook.

As a reminder, our historical seasonality from the June to September quarter has been flat revenue.

However, this year, we expect our September quarter to be lower than seasonal due to lower revenue from Samsung walk away and battery management systems customers.

I will next provide color by end market.

And I will start with automotive.

In the June quarter, or automotive business was up 2% from the same quarter last year. Despite the significant year over year decline global car production.

This decline impacted or infotainment and auto body electronics businesses, which was offset by strength in battery management system products for electric vehicles and growth in driver assistance revenue.

In the September quarter, we anticipate a slow quarter driven by expected soft environment for automotive production units.

In battery management systems for electric vehicles, we are forecasting lower shipments given the market uncertainty in China.

Due to changing subsidies and lower auto demand from consumers.

However, we still anticipate year over year growth revenue growth in electric vehicle BMS products in the September quarter.

Looking forward, we have a growing pipeline of design wins in serial link products were parking assistance.

Over the last few years, we have one surround view sockets at nine Chinese Oems some of whom have started production with our parks.

In China. We also have design win traction for our next generation serial link products that enable higher resolution displays.

In camera systems.

The first of these customers have started receiving production shipments of the serial link products.

Additionally for automotive lighting, we're introducing new products or would the adaptive lighting applications as well as driver monitoring systems.

Maxims products for driver monitoring work with our serial link technology for Adas applications that comply with the highest automotive safety integrity levels.

These new LNG lighting products are currently initial production and are expected to reach volume production in the next few years.

Fiscal 19 was a record year for automotive design wins.

During the fiscal year, we won't close to $1.1 billion in our pipeline of new design wins, which was up 26% from the prior fiscal year.

Let me next turn to the industrial market.

In the June quarter, industrial was down 20% from the same quarter last year, reflecting the softer demand environment.

Within distribution global Resales were seasonally up.

In the September quarter, we expect continued seasonality in industrial and roughly flat sequentially resales in distribution.

With the overall business at a significantly lower level than last year.

We will remain disciplined with channel inventory as we maintain inventory days around our target of 60.

Bruce will provide further details on the distribution business right. After me.

Let me next discuss communications and data center.

In the June quarter, Comms and data center was down 23% from the same quarter last year.

As we expected we saw a lower demand for 100 G laser driver products for optical modules used in Hyperscale intra data center applications.

You're on your revenues also declined in a broad base of building block products.

The September quarter, we anticipate Compton data center revenue to be down sequentially with strong growth in one hundredg laser driver shipments offset by declines at Wawa and weakness in a broad base of building block products.

Our customers are indicating that their excess inventory of 100 G laser drivers and modules has been reduced and we are starting to see customers, placing orders for our products.

Finally, let me turn to consumers.

In the June quarter consumer was down 7% from the same quarter last year weakness in smartphones, partially offset by growth in tablets Wearables and peripherals.

Smartphones comprise less than half of our consumer business in the quarter.

Going forward, we expect Samsung consumer revenue to decline from approximately 10% of our total revenue in fiscal 19.

To a mid single digit percentage of total revenue in fiscal 20, due to lower content and unit shipments.

In the September quarter, Samsung revenue is expected to decline over 50% from the same quarter last year.

Despite the hit the smartphone headwind.

We expect consumer to be up sequentially due to growth in our broad based consumer business and gaming peripherals Wearables and tablets.

To summarize we have built maxim to be successful in any environment, including the current downturn and to position the company to outperform in the next market upturn.

We are growing our content and new design, a new design wins in long product lifecycle end markets, such as automotive and industrial.

Our analog business model and flexible manufacturing strategy enable our consistent company profitability and stability.

All of this results in strong predictable free cash flow.

This enables us to increase our dividend again this year as we have consistently done each year for the last decade.

About an hour ago, we released the announcement that Brian White will be our next chief financial Officer.

So this will likely be our last earnings report with Bruce on the call I want to make take a moment to recognize bruce's contributions to me and to maximize.

I feel very fortunate to have that Bruce at my side as a trusted partner for over 11 years.

He has been instrumental instrumental in driving many of our initiatives and together, we've structurally improve maxim for strong performance over the long term.

In addition to the benefits of Bruce's financial acumen. He has consistently delivered on the operational front well looking out for the best interest of employees.

I would also like to thank our shareholders and the investment community for their support as we make this important transition.

Now I'll turn the call over to Bruce one last time.

Thanks, very much much appreciated.

And thank you to everyone on the call today.

I'm very pleased to welcome Brian White to the Maxim team.

As announced today he will join Maxim on August 12, and become CFO . After we file our 10-K.

Brian successful run as CFO of ITC and his 30 years of industry experience make him uniquely qualified to lead Maxim going forward.

Turning to our results revenue for Q4 was $557 million inline with expectations up 3% sequentially and down 12% from the same quarter a year ago.

Well. This is clearly a period of soft demand Maxim is built to perform in any environment. Our trailing 12 month free cash flow was $793 million and was 34% of trailing 12 month revenue.

In fiscal 2019, we exceeded our commitment to return 125% of free cash flow to shareholders.

Today, we announced that we will increase our dividend by 4% despite the soft business environment.

In fiscal 2020, we plan to again return, 125% or more a free cash flow through dividends and share repurchases.

Our revenue mix by major markets in Q4 was approximately 29% industrial 25% automotive, 25% consumer 17% common data center and 4% computing.

Our industrial and automotive businesses comprised 54% of our revenue in the quarter.

Starting in Q1, starting in our Q1 earnings report, we will be using an automated system to math revenue to end markets.

As most of you know end market mapping can be a challenge in our industry given that we have thousands of products and thousands of customers.

This updated mapping will result in some changes to our revenue breakout by end market. Starting next quarter. However, as we looked at sequential trends from Q4 to Q1 in both the current and the new system. Today's guidance is the same regardless of the system use.

As an aid for investors when we make this change we will provide four quarters of history.

However for the time be all of today's commentary references the existing mapping.

Also because the computing segment is small and it's not an R&D focus area for Maxim next quarter, we'll be combining computing with the communications and datacenter segment, enabling us to combine Pcs and peripherals into the same category as servers.

Let me now turn to the distribution channel.

Distribution comprised 50% of maxims revenue in Q4, I am pleased to announce that we ended the quarter with 59 days of inventory in the channel down from 64 days in the prior quarter.

Channel inventory dollars were flat from the prior quarter, while resales were up 8% sequentially.

This inventory performance demonstrates our commitment to closely manage inventory in the distribution channel and partner with our distributors to maximize performance and the current uncertain environment.

We are committed to maintain our current channel inventory around 60 days.

Turning to the PNM maxims gross margin, excluding special items was 64.8% up 100 basis points from the prior quarter with the increase driven by higher revenue and lower inventory reserves.

Operating expenses, excluding special items were $180 million down from the prior quarter and below our guidance, reflecting tight cost controls.

Q4, GAAP operating income excluding special items was $180 million.

Operating margin was 32% of revenue up from the prior quarter due to higher gross margin.

Q4, GAAP tax rate, excluding special items was 14%.

GAAP earnings per share excluding special items was 57 cents in line with expectations.

Turning to the balance sheet and cash flow overall total cash cash equivalents and short term investments were $1.9 billion flat with the prior quarter.

Q4 inventory days ended at 114 down 12 days from Q3 and inventory dollars were down 10% from the prior quarter capital expenditures were $31 million in the quarter.

Trailing 12 month free cash flow was $793 million or 34% of revenue.

Which is down 15% year over year on an adjusted basis or up 5% on an unadjusted basis.

Adjusted fiscal 2018 free cash flow excludes the onetime tax payment of $178 million in Q4 18.

Our free cash flow per share was $2.87, our free cash flow yield is 4.4% at yesterday's closing stock price.

For capital return share repurchases totaled $102 million in Q4, as we bought back approximately 1.8 million shares.

Dividends totaled $125 million in the quarter based on Yesterdays closing stock price and our increased dividend of 48 cents per share our dividend yield is 3%.

Our beginning Q1 backlog was $391 million based on this beginning backlog and expected turns we forecast Q1 revenue of $510 million to $550 million.

Q1 gross margin, excluding special items is forecasted at 63% to 65%.

Down from Q4, due to lower revenue and lower utilization of our internal fab as we perform facility upgrades.

Q1 operating expenses, excluding special items are expected to be in the low one eighties due to continued tight cost controls.

Our tax rate for Q1, excluding special items is expected to be 14% flat with the prior quarter.

For Q1 GAAP earnings per share excluding special items, we expect a range of 46 to 52 cents.

For F Y 20, we expect capital expenditures to be down from the prior year near the midpoint of our targeted range of 1% to 3% of revenue as we complete facility upgrades at our internal fab.

We returned 132% of free cash flow to investors in fiscal 2019 in fiscal 2020, we again plan to return, 125% or more free cash flow to investors.

In summary, given the current environment, we are tightly managing spending and inventory both internally and in the channel.

We continue to invest in our long term secular growth drivers of automotive industrial and data center.

Our financial model enables us to generate strong consistent cash flow in any environment as evidenced by our commitment to return, 125% or more a free cash flow to investors and the increase in our dividend announced today.

And finally as this is my last earnings conference call I want to thank all our investors and sell side analysts for their support over my nearly 12 years at Maxim.

It has been a great honor to be part of the Maxim team.

Im proud of our many accomplishments as we transform Maxim.

At Maxim, we truly make a difference for our customers our shareholders our employees and the communities where we operate.

I'm highly confident that todays Brian and the 7000 Maxum employees will continue to maximize value for all our stakeholders. Thank you.

And with that I will turn the call back over to Kathy.

Thanks Bruce.

That concludes our prepared remarks, and we will now open the call for questions.

We'd like to continue the same Q in a process that we've used in previous calls we'll take one question from each caller. So we can get to as many people as possible.

Jonathan could we please have our first question.

Certainly ladies and gentlemen, if you have a question at this time. Please press Star then one on your Touchtone telephone if your question has been.

I answered and you'd like to move yourself from the queue. Please press the pound key our first question comes from the line of Ross Seymore from Deutsche Bank. Your question. Please.

Hi, guys. Thanks for let me ask the question before I do that just wanted to say congrats and good by Bruce a pleasure working with you.

So for tunes and or Bruce just wanted to talk about that the general environment.

Last quarter stabilization was kind of a word that was used on your call and it seems like things have taken another step down so what do you want to split it into the various end markets and talk about it or just in aggregate can you just talk about what changed from one quarter. The next is it just the China trade is at Wawa way, if you want to size that or are there other dynamics that we should appreciate.

So we're also picked up.

Bruce could noted.

If he wishes.

So we did say that the demand.

Seems to stabilize we didn't say there was a rebound or less time.

The demand is stabilized at a lower level that is used to.

And it remains soft across all end markets.

Basically what we had said that we kind of saw seasonal patterns and except for a few exceptions that I am going to mentioned things do still look seasonal.

So if you break it down by market.

Industrial is seasonal from fiscal Q4 to Q1, so but there is no rebound frankly.

Automotive was up in Q4, but down more than seasonal in Q1, and this is being impacted a lot by the BMS uncertainty I talked about in my prepared remarks.

Customers are starting to order again in data center optical so that's that's going to help out with the come soon.

Comms infrastructure and there is broad based weakness on the communication side and this has impacted a lot by lower so in essence on walk away.

We have for most of our products, we actually are able to ship.

But we're always kind of realigning their demand and we don't really have good visibility from a backlog standpoint as to what they want.

So to be on the safe side, we've basically taken their forecast way down.

And that means that they are kind of.

Roughly having an effect of about $10 million or so in the quarter.

And then consumers.

Our broad market business is up strongly which is good in tablets wearables and gaming, but this is offset by lower content in Samsung phones.

So those three effects combined which were just to remind you again vms uncertainty will always uncertainty and the Samsung content and unit reduction they contribute about $30 million or so so that's the biggest weakness that you're seeing but the rest of it is kind of seasonal kind of pretty similar to what we said in the previous quarter Hope that gave you some color and Bruce that or if you want to add anything no. I think you said it well since I did I would just add three year seasonality for the September quarter, It's flat, that's actually really pretty consistent there. So we would have started out about.

Fivesixty had been normal and then there is kind of the.

The $30 million a third a third a third that turns just outlined.

That really kind of put us where we're at today.

Thanks.

Yes. Thank you Ross thank you.

Thank you. Our next question comes in line of Harlan sur from JP Morgan Your question. Please.

Good afternoon. Thanks for taking my question and Bruce. Thank you very much for your support over the years and I wish you well in retirement.

To follow up on the last question, maybe more specifically in industrial that it looks like in the June quarter industrial didn't grow as strongly as you anticipated and.

I know you are guiding industrial down again sequentially in the December quarter kind of seasonal but that seems to be off from the June quarter that was a bit weaker than expected can you just help us understand.

Maybe a little bit more in detail what happened from back in late April and factory automation trends are picking up youre seeing broad recovery across some of the geographies I think even your SMB catalog business, we're seeing some good demand trends as well. So maybe you can just provide us a bit more color on what happened as the quarter progressed.

Yeah. So when we look at our industrial business and you're in you're right we guided.

Industrial up strongly in the June quarter, and we had talked about that.

A lot of that had been off of a kind of a weak March.

Where we kind of took our medicine in bringing down our Disti channel inventory.

So industrial was up sequentially in line with probably similar or normal seasonality for the June quarter, but it wasn't up strongly so did come in a little bit weaker.

As we saw the overall business and and clearly.

Our order patterns have stabilized.

But we haven't really seen a pickup in in industrial.

As as similar to what we did in the March quarter, we brought channel inventory down again this time.

From 64 days down to 59.

So and you saw basically resales were up 8% and we kept inventory in the channel flat. So basically we are we are undershipping demand.

In order to.

Aggressively get our channel inventory down so I think it's just a combination of we haven't seen any any any form of kind of rebound in industrial we haven't seen it really getting weaker but this combination of sort of kind of flat order flow at it at a lower level combined with managing channel inventory really kind of resulted in us coming in a little bit lighter than we thought when we look at the.

September quarter again.

We're seeing it down but in line with normal seasonality actually nothing nothing unusual there. The challenge of course is its off this.

Much lower base and I think we're all looking for when that balance going to come back and I think we haven't seen that yet.

Thank you we haven't seen it yet yes, let me add a little bit so we haven't seen that yet.

We've proved a few customers to see how they're doing on.

On their inventory levels and some of them are they are still saying they are working down inventory by the way and and they expect that.

Those inventory reductions to to kind of get back to normal levels sometime in the late second half of the year.

That's not a broad survey that's a few customers, we ask but thats the answer that we got.

Great. Thank you.

Thank you Harlan.

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

Hi, Thank you very much and Bruce thanks been a pleasure.

Wish you all the best and you are leaving behind big shoes to fill here.

For my question I wanted to go into factory loadings, and maybe I missed it last quarter.

What does this facility upgrade and what's the impact of that on margins and how should we think about.

Well, what's the playbook now are you reducing loadings further as you look out looks like definitely more prolonged downturn than you might have been thinking 90 days ago. Thank you.

Yes, so we had.

If you look at our Capex, we came in above our 1% to 2%.

Model I think we came in I think it was right about 3.6% capex as a percent of revenue and we had identified that we were making.

Some updates to our loan remaining fab and this was to the electrical systems to the water systems and so we were spending that money in fynineteen to do that we've completed the bulk of that work, we got it done kind of on schedule and during the kind of July 4th.

Time period.

In essence, we shut the fab down.

For two weeks and that really kind of lowered our moves in the fab by about 15%.

During that time period.

And so that certainly has an impact I think it's I think it's maybe 2030 bips.

So thats just one of the reasons, certainly thats, causing us not to be quite as.

Strong has we have before obviously the lower revenue in our desire you solace just overall in addition to.

The fab shutdown.

You saw that in the June quarter, right. We took overall inventory down by 12 days right from 126 down 2014, So again thats just us setting ourselves up for as things come back we're going to have lean inventory, we're not going to have to we're going to be able to see the immediate benefit us as revenue comes back from a from a margin point of view.

Okay. Thank you.

Yes, Thanks Ambrish.

Thank you. Our next question comes from the line of feedback are you from BMO.

Yes, sorry.

A question please.

This is James I click on for.

Thanks for letting me ask the question.

Could you talk a little bit about the competitive environment and the Vms market.

Do you see increased competition in that market.

Is the weakness in the September quarter.

You also to the macro softness that you're seeing or could it be more competitive positioning.

Yes, so I'll comment about businesses two inch so.

First of all.

Yes. This is part of the automotive market with.

Market share changes will occur relatively slowly so you don't really see it and.

One or two quarters.

The we've grown the BMS business significantly over the last few years.

I don't know if you recall, but last.

So in the second half of last year, we were talking about year over year growth rates, there were 50% to 75%, which which is huge.

What what's changed now is the fact that.

There's been a change in the way the subsidies or paid out in China, and we think that that will have a maybe a dampening of the.

The sale of the cars.

And taking that into consideration, we reduced our forecast for that market.

Now having said that.

Number one we're still growing in the mid twentys year over year or would still call that pretty healthy growth, even though we're seeing this.

Quarter over quarter deceleration.

And the second part of that is.

Overall, the subsidies will have an effect, but the Chinese government still has.

Their policy or their objective is to grow electric vehicles from about 1.1 million a couple of years ago to almost 2 million.

In the next couple of years. So I think the demand is going to be healthy. We just didn't know how to forecast what was going to happen on consumer behavior.

In terms of competitive this I think we have a strong product portfolio.

The products are very robust and.

In terms of a severe safety requirements that our customers like that plus the fact that we have tremendous history with the products.

Been used for years by our customers, which means that.

There's less risk from from a customer standpoint.

So this is hopefully I gave some color on what it is that caused us to two.

Essentially forecast Vms revenue to be down quarter over quarter, but as I said before it's still up mid 20 percents year over year.

Hopefully that helps.

Thank you Jamie.

Thank you. Our next question comes from the line of Craig Hettenbach from Morgan Stanley . Your question. Please.

Yes. Thank you a question on the industrial market understanding that it's weak demand and inventories coming down, but just more so from a design perspective are you seeing customers pause at all in terms of how they look at new design opportunities. If you give any color on that.

We you are talking about the design win activity that you're asking about that I assume.

No we're not seeing that things are as robust as they've ever been in terms of them looking for products that help them build more.

Productive factories, so that it really has not changed the.

Level of interest in our communications products and our high efficiency small power supply products.

That's very robust and customers are asking us for more advanced parts, frankly, and helping us define newer generation products as well so despite the fact that there's.

The slowdown that we're absorbing the design.

Design of new generation of factory automation products that our customers continues to be very robust.

Got it thank you.

Thank you Craig.

Thank you. Our next question comes from the line of Blayne Curtis from Barclays. Your question. Please.

Hey, guys. This is Tom O'malley on for Blayne, Curtis and I, just wanted to echo the sentiment from others and thank Bruce.

But my question here is on December .

Moving forward I know there is not much visibility in the market right now, but can you kind of do your best to quantify what you think is normal seasonal for December and just any kind of color you have on the moving pieces. There just a better give us a feel of how you guys are viewing the end of the year the calendar year.

Yes so.

I think we all know that this isn't a.

And our normal time period right now.

And so from that point of view, but meat you just at the highest level kind of by the end markets.

Look back historically, usually a consumer is seasonally down after you know a strong September and we're seeing certainly a good September takeout Samsung in our broad based business is doing doing very well.

Industrial's, usually kind of seasonally flat.

And but again, we've talked about the industrial businesses were kind of waiting its kind of very stable, but we havent seen the rebound yet automotive is usually seasonally up as people start shipping and in advance.

And then of course comms and datacenter is is not seasonal hum and that's going to be dependent on.

What's happening to that this kind of this rebound or this kind of startup reordering on the datacenter continue and then of course you know.

What happens with wall way would be the other kind of open question that we have so if you think about some of the several items that we've kind of called out this quarter I think all of those are going to be open questions for December as well.

Thanks.

Great. Thank you Tim.

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

Yes. Good afternoon, guys. Thanks, Let me ask the question Bruce. Thank you for all the help through the years and enjoy their retirement.

I guess my question going back to the consumer markets and the smartphone market in general I guess, despite really good efforts to diversify away from smartphones in that bucket and the largest customer Samsung it still feels like.

That's a headwind so I'm kind of curious from here.

Philosophically is that a market and the customer that you still think it is important to support going forward or help us understand that can you reallocate resources or take further costs out of the model as you continue to try to deemphasize that part of the business.

Well from froman. Okay. So your questions are more about R&D investment I mean in essence.

At.

That one large customer.

So we've got sockets, where we.

Add value and our customer cares about it.

The level of investment that's required on those.

We have some big program is not really very high.

Our resources are R&D investment really has been mostly in.

In product lines that are more general purpose and diversified to all the other markets that we talked about like durables in wearables, and and peripherals and gaming and so on so.

A lot of the shift nor have already occurred in terms of R&D investment.

So what we really look at.

John is to see what the return on investment is going to be.

We have a bar that is higher for short lived products in terms of returns.

Then our other product areas so.

Really we don't see a need to really make some major investment changes in turn in terms of.

Research and development.

And most of our investments have been in other areas of consumer for for a while now.

So.

So I think that changes, maybe your suggestion or kind of behind us or.

In terms of what we've done in the past year or so.

Yeah, and John just to put some numbers to that on just the business side I mean in Q4, right basically consumer was flat.

But we had obviously smartphone and Samsung down significantly while our broad market businesses gaming Wearables tablets was up 30% quarter over quarter.

So we did see some some strong growth there and when we look at the September quarter.

Again, we're seeing sort of our our consumer business at Samsung up 15% sequentially. So we are seeing that and again that's been as Tim said, we made that shift in R&D.

And focus several years ago, and we're seeing that benefit obviously, you know as we've kind of taken this step from Samsung being a kind of call it roughly a 10% customer down to a mid single digit.

You see that that one step down.

But I think.

The strategy to move to broad based consumer that it's working very effectively as we are able to continue to keep consumer flat and sequentially in June and still grow it in September despite the significant take downs and Samsung.

Thanks, guys.

Yes, Thank you John .

Thank you. Our next question comes from the line of Matt Ramsay from Cowen Your question. Please.

Hi, This is Josh buchalter on behalf of Matt. Thanks for taking my question and let me Echo My congrats to Bruce and best of luck to Brian .

So I guess, despite the revenue softness your gross margins have held up comparatively well compared to past cycles. I was hoping you could talk about some of the measures you can't you've taken here and how your fab light model plays into this.

And also assuming that you know we are now shipping closer to end demand you should current levels represent roughly the bottom. Thank you.

Yes, So I think if you look at gross margin in part of our transformation was.

We really went from a company that when I joined.

Almost 12 years ago, we were about.

85, 90% and internal fab source.

And today, we're about 25%, so we really shifted to a much more variable.

Model and kind of one of the ways that we've tried to capture this is.

10 years ago, when the recession, and we are you know thats kind of 85% internal.

For a 10% drop in revenue, we probably would have lost about five points of gross margin.

Today with the kind of the outsource model.

For that same 10% drop in revenue, we lose about one to two points of gross margin from utilization and if we kind of test that against our results here.

It actually the model is holding up we're a little were on the high end of that of the range of the 1% to 2%, but part of that is just simply because we're also trying to reduce deal why at the same time right and so we're starting wafers below demand.

And then we've seen a little bit the other element is we've seen a little bit higher inventory reserve on a year over year basis.

Again because of the slowdown.

But we still feel very confident.

In our gross margin story, we think we can get back to you know our range is 67% to 70%. We can get we think we get back there you know that something a little bit over 600 million.

And feel good about that and we believe that the growth drivers are the tailwinds for our gross margin are still absolutely in place right whether that continuing to drive you know put more wafers through our loan fab up in Oregon, whether that's through kind of being able to kind of for the rest of our foundry network kind of optimize that for the lowest cost.

The move to distribution into SMB.

And the favorable pricing environment, all those tailwinds are still in place and we still feel very good.

And just the fact that we know we're able in sort of the current environment, we're still at 60, 465%.

Feels very good to us and it's been a good stress test.

For the model and we're looking forward to.

Kind of moving that gross margin back up as as revenue.

Inevitably returns.

Thank you.

Thank you Josh.

Thank you. Our next question comes from the line of its always fun work from Stifel. Your question. Please.

Yes. Thank you.

Welcome to Brian and congratulations to you Bruce failure, an exemplary CFO and really appreciate it.

You over all these years.

I had a question back on distribution.

It just feels a little bit like that this channel is trying to lower inventories, perhaps even more than where demand is and I know, obviously youre resales were pretty strong but.

Just like sort of perceiving that the runway.

I think you know candidly I think our sense is we're probably being a little bit more aggressive on reducing inventory.

That's something I have a strong belief about.

And so we've been kind of pushing to lower MTR I would say in some situations.

In Asia, particularly I think distributors want to carry a little extra inventory whether that.

Is in support of kind of larger Oems, whether it's in automotive whether its in in gaming.

And.

The datacenter starts to come back.

So we I would say that that push to kind of manage inventory within the kind of the the area of around 60 days is it more from from Maxim and especially on a sell in basis. You just don't want to get caught with too much inventory in a cyclical and a cyclical business.

And so we've been managing that and as you said you know basically we had good resale was up 8% normal seasonality is that five.

So I think that was positive and we pretty much saw strength.

China was up 14%, Japan up 16%, Taiwan up six.

These were you know Asia was was reasonably comfortable from that point of view and we just use that opportunity to kind of manage our shipments and in order to bring down the overall channel deal why.

Very helpful. Thank you.

Yes, Thank you Troy.

Thank you. Our next question comes from the line of the Shia Hari from Goldman Sachs. Your question. Please.

Hi, guys. Thanks for taking the question. This is Charles long on for Toshiya.

Also Bruce Congrats good luck and all your future endeavors.

I just had a quick question on the overall high priest Hyperscale environment I was wondering how you would characterize it as it stands today and if you've got any visibility on potential pickup or stronger trends in that end market. Thanks.

So.

All right. So the larger portion of our Hyperscale business currently is actually on the optical side.

And on the optical side, there was a growth in inventory that occurred last year.

And what we're seeing is.

My commentary is going to be limited, mostly to that piece of the business and.

That inventory.

Quite a while multiple quarters to actually work itself down so what we're seeing from.

The the module customers that we sell into and then the module customers. So the guide for scale.

And customers, they're pretty much.

Indicating to us that their inventory levels are now coming back to normal and they've started placing orders. So that is not a direct implication about hyperscale customers because there is another.

Somebody else.

In the way that.

That's also building inventory so.

But it does indicate that if there was extra inventory at the end hyperscale customers a lot of that must have been consumed as well.

So that's kind of the extent of our knowledge or look into the cloud customers.

I don't know how much that helps but that's that's all we can really say.

Got it thank you.

All right. Thank you Charles.

Thank you. Our next question comes from the line of Mitch Steves from RBC capital markets. Your question. Please.

Hey, guys. Thanks for taking my question I, just wanted to circle back to auto and industrial piece I think theres, a little bit concerned that that's going to kind of be a longer I guess semi cycle downturn and then there is a lot of concern around the cash share shift so how should I think about your guys' current position auto and industrial you guys think you're gaining share in that space. What do you think the underlying growth rate is for both those.

So.

So let me just talk about automotive first so in the automotive market.

We for many years, we actually were growing faster than the market growth and we projected we still will grow faster than market growth.

Mainly because of two major growth drivers for us one of them one of them being the BMS market and the second one being.

The serial link products or Adas products that the company is making.

So those two I think we're still robust areas, where we have a strong position as well as a strong pipeline of products not to mention the strong design wins that I talked about that we registered throughout the year.

The infotainment piece will probably grow grow at similar rates as.

Infotainment content in cars.

And I think that's still pretty robust, it's more than the automotive unit sales growth. So.

I think were automotive, we're going to do well, but.

It's in especially in markets, where we have is a large revenue content, which is infotainment and auto body electronics.

We will be impacted by auto.

Car production in the World and right now that's kind of going through a.

The negative growth period.

But I think eventually people will buy cars.

So it will recover and.

And I think we'll be able to grow because of the two growth drivers I mentioned, we'll be able to grow faster than the market growth.

Got it perfect. Thanks, and then just a quick clarifying on where you guys think how long the cycle can last in terms of the auto in industrial.

So that is that's always a dangerous thing to predict.

You know we.

It's.

Not very easy to do we look at charts.

To see how we can predict that.

But it's pretty elusive.

I think there are just too many external factors that are affecting it.

And those factors bring what's happening with trade, what's going on with with China.

Those are all kind of affecting both the automotive part as well as the industrial part of the business significantly. So we were not going to of course, Bruce can take this risk and predicted.

Okay.

But from from my point of view, its very difficult to say, where the end is the metrics that we watch for is what kind of bookings are we getting.

But that only gives you were.

Three month view.

And we ask questions to our customers about inventory levels cause that I gave you some color on the industrial.

Inventory answers, we got from just a handful maybe two or three customers.

But other than that we don't have a clear view of.

When the cycle.

Finally ends.

Right It will end Sunday.

Okay. Thank you Mitch.

Thank you. Our next question comes from the line CJ Muse from Evercore. Your question. Please.

Yeah. Good afternoon. Thank you for taking the question.

And Bruce let me Echo everyone else's thoughts you will be missed.

Quick follow up question on on fall way.

You talked about.

Into September .

Declines, while we as well as the weakness broad based products and just curious here. You also said that you were able to ship most products to walk away. So.

Do you have disproportionate share to fall away or is the entire supply chain in fourq given the uncertainty of weather.

Business will move to two other players can you provide a little bit more color on how we should be thinking about.

The uncertainty there and when you think we'll have better visibility.

Two.

And demand and growth drivers there going forward.

Yeah. So I mean, when we think about walk away and we've said this before they are about 2% of revenue.

You think about that kind of like 50 million a year kind of number.

We were able to.

As soon said, we've been generally able to ship product kind of within within the rules and.

In essence, didnt see much impact in the in the June quarter.

When we look at September and we kind of talk to walk away and talk with you know within the channel. What we see is basically we're always trying to kind of sort through their supply chain and try to as Tim said trying to figure out what backlog do they want to place and I think it's you know it's a whole combination what's their demand what's their inventory levels, just the availability of the entire bomb.

And we just saw a lot of uncertainty there and so in essence, we almost zeroed out walk away I think we left a small amount in there, but as Tim said, it's probably down $10 million quarter over quarter.

Which if you think about $50 million on a run rate that that's most of it.

There could be upside, we're obviously continuing to meet with walk away and understand what their demand is but I think just from a from a from being prudent from a forecast.

My capabilities, but for now Weve kind of guided as we always do to what we kind of think weekend.

Say confidently and investors can count on and so thats kind of what we've done I think for the for the broader common data center outside of Wal way, obviously tunes talked about datacenter, we've definitely seen orders coming back there.

And so that business is up.

Up strongly sequentially, but of course, it's still down.

Year over year, and then on the overall comm market again, I think similar to industrial I think we still see.

Kind of stable order flow, but at a much lower level right. So that kind of that broad based weakness similar to what we've seen in industrial.

It it's stable, but we haven't seen kind of signs of that recovery yet.

Thank you.

Yes, Thank you TJ.

Thank you. Our next question comes from the line of Chris K cell from Raymond James Your question. Please.

Yes. Thank you ill certainly echo my congratulations to Bruce it's been a pleasure.

My question is on the comments on the Samsung business and you had some earlier comments.

As as that drops to 5% of revenue and in fiscal 2000, I guess the question is once it gets down to that 5% level whats left and.

From there based on the R&D and the design work you had are you do you expect to grow that business is that kind of just the steady state business at that point or at that.

Revenue level, some of the Wearables and non handset parts of the business allow it to grow going forward.

Yes so.

I don't know, if we're giving the wrong impression here, but Samsung is still a very valued customer.

And we continue to support them in their design other products and they buy more than just smartphone products from us by the way.

A single.

A product company so.

From our viewpoint, though.

When when we see opportunities were we want to be careful that we're doing something special.

In terms of performance for them and from our viewpoint.

You know if we find those types of opportunities in the return on investment make sense. We definitely will go for those sockets, but in terms of forecasting next year and so on we wanted to make sure that we gave what we felt was the most likely outcome, what's going to happen next year.

But I don't want anybody to have the impression that.

We're we're we don't value that customer we do they have been a good partner to us for many years and we will continue to sell or market our products to them just like we ever have.

And continue on that whether they will grow or not time is going to show.

And that might or might not.

And in terms of the.

Basically the product that we have forecasted for next year product to be used for many years and it's one that the value when they see the performance advantages from from Maxim. So we believe they're going to continue to use it.

Thank you.

Thank you Chris.

Thank you. Our next question comes from the line of William Stein from Suntrust. Your question. Please.

Great. Thanks for taking my question and Bruce I'll Echo my congratulations.

A question on the M&A environment.

Maxim has not participated recently, although in the past it had been there's been some incremental.

Level of deal flow in the last.

The last few months and I'm wondering to what degree Max and would consider participating.

Yes, I mean, our M&A stance really has not changed.

Were we continue to look for.

Any companies or product lines for that matter at other companies where.

They will be accretive to us, though you know after we go through and and work through the integration they will be.

You know not dilutive to our great margin structure.

And in the end, we don't overpay.

So, especially on that last part you're going to see with stock prices at these levels. It makes it pretty difficult to find a good fit to Maxim.

But as I said were we still look we have a corporate business development group and we look at what the.

The assets are that we can purchase and.

And see if we can add revenue and and free cash flow that way as well.

Great. Thank you.

Thank you well.

Thank you. Our next question comes from the line of Cody Acree from LP Capital. Your question. Please.

Yes, Thanks for taking my question and great Congrats and thanks for all the time over the years.

I guess, just your thoughts on Opex, it sounds like things might be uncertain for quite some time and maybe Brian will have different thoughts later, but what are your current thinking.

Around Opex for next year.

Yeah, So I think.

As you've seen we tightly control opex, we kind of keep it in line with revenue. We are usually in this period of a kind of a slowdown usually come in underneath our forecast a little bit.

It's a very experienced management team.

We've all been in the in the industry, we all understand cycles.

So easily before you know my team can go out and and revised target the management teams already off kind of lowering spending in controlling areas.

That said.

I think it's important to highlight that we are absolutely continuing to invest in our in our growth areas right. We'll continue to invest in whether that in the industrial and factory automation or whether its automotive.

Whether it's in the data center, even in you know to the extent sort of the broad based consumer business and so we understand those were good at making choices and then kind of doing our DVB and drawing the line of where we invest but you got to believe what's going to drive growth in the future is above the line and we're continuing to invest and we're just pretty good at continuing to take the more discretionary items and being pretty pretty tight on knows.

As far as a model goes you know our standard model has always been to grow at about half the rate of revenue.

And I think that.

How we'll continue to look at Opex going forward.

But as we've said like in the overall environment and it's difficult to predict what's going to happen on the revenue side, but those things we control whether it's opex.

Whether its spending and.

And within our Fabs, whether its inventory on our own books inventory in the channel all those things within our control we're going to tightly manage.

Such that we continue to generate 34% free cash flow margins.

In a downturn and obviously generate much more than that in the upturn.

Great. Thank you much.

Kevin Thank you Cody.

Thank you. Our next question comes from the line of Christopher Rolland from Susquehanna. Your question. Please.

Hi, it's David Haverly on behalf of Chris.

You mentioned the pipeline of new automotive design wins of 1.1 billion in 2019 and that its up strongly year over year.

Can you give us a sense of your expectations for how this pipeline ultimately convert into revenue and then also which products make up the bulk of the 1.1 billion, whether its growth opportunities such as BMS in a das or more legacy type of auto products.

So okay sorry.

The part first of all the pipeline obviously is the lifetime revenue you get from those design wins, maybe I wasn't clear about that.

So Howard distributes kind of depends on the particular design win some products of design wins of longer lives than others.

Much of this this win is in the areas that I mentioned before.

I think if you look at them there.

Serial link was a.

The area of wins automotive power products, whether whichever.

And function they go into or a big portion of it and be BMS also what was large so it's all in the expected areas.

Of the design wins and.

I think that were.

We ended the growth as I said was about 20%, 26% year over year. So all that kind of signals that we're going to have.

Robust growth once the automotive production cuts back.

In line with.

What the long term growth rate has been which is in the.

Two or 3% unit growth in the high single digits for content growth and we think we're going to grow better than that so still in the low.

Teens is our expectation.

But most of those design wins came exactly in the areas that we were investing in which should be no surprise and they were kind of all over the world. So there is no.

Single region, where they were concentrated in either so that's why we're we're feeling very good about future growth in automotive.

Hi, Thank you David.

Thank you.

And I'm not showing any further questions in the queue at this time I'd like to hand, the program back to Kathy for any further remarks.

Thank you Jonathan.

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

Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program.

You may now disconnect good day.