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Maxim Integrated Products (NASDAQ:MXIM)
Q1 2019 Earnings Conference Call
Oct. 30, 2018 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the Maxim Integrated first quarter of fiscal 2019 conference call. [Operator instructions] As a reminder, today's program is being recorded.I would now like to introduce your host for today's program, Kathy Ta, vice president, investor relations. Please go ahead, Kathy.

Kathy Ta -- Vice President, Investor Relations

Thank you, Andrew. Welcome, everyone, to Maxim Integrated's fiscal first-quarter 2019 earnings conference call. Joining me on the call today are Chief Executive Officer Tunc Doluca and Chief Financial Officer Bruce Kiddoo. I would like to highlight that we have posted a supplemental financial presentation to our Investor Relations website.

The information in this presentation accompanies the financial disclosures in our press release and on this conference call. During today's call, we will be making some forward-looking statements. In light of the Private Securities Litigation Reform Act, I'd like to remind you that these statements must be considered in conjunction with the cautionary warnings that appear in our SEC filings. Investors are cautioned that all forward-looking statements in this call involve risks and uncertainty, and that future events may differ materially from the statements made.

For additional information, please refer to the company's Securities and Exchange Commission filings, which are posted on our website. Now I'll turn the call over to Tunc.

Tunc Doluca -- Chief Executive Officer

Thank you, Kathy. Good afternoon to all our participants and thank you for joining us today. We appreciate your interest in Maxim Integrated. Our September quarter results were solid.

Compared to the same quarter last year, revenue and profitability grew strongly, driven by Automotive, Consumer, Industrial, and Data Center. Looking forward, we are seeing softening business conditions. However, we believe our business model enables us to be successful in any environment. Due to our strong free cash flow and positive net cash balance, we plan to return 125% of free cash flow to shareholders this fiscal year by increasing the share buyback.

We believe buying our shares is the best use of our cash in the current environment. I want to remind investors that our second fiscal quarter last year was a 14-week quarter and was also impacted by the transition to sell-in accounting at one distributor. My comments on December quarter year-on-year comparisons adjust down year-ago quarter revenue for both of these items. Let me now discuss September results and current quarter outlook, starting with Automotive.

In the September quarter, our Automotive business was up 15% from the same quarter last year. We continue to see the strongest demand signals from battery management systems for electric vehicles and driver assistance content. Our content growth opportunities for Maxim in ADAS applications continue to be centered on power management and point-to-point serial link data communication products. Recently, we introduced a new generation of serial link products for transporting video, audio, and data in automotive applications.

This GMSL-2 technology supports 6 gigabit per second transfers for display and driver assistance and can also transport 1 gigabit per second Ethernet. Our technology includes diagnostic capabilities to assist the health of the link and is compliant with automotive safety integrity level standards, making it suitable for autonomous drive applications. The first pair of products lead many GMSL-2 products to follow in the coming year. We received extremely strong customer pull for this product family.

Customers have ordered over 90,000 engineering prototypes in the first three months and we had already won designs at seven different OEMs. Turning to battery management systems for electric vehicles. We are growing our global footprint as design wins from prior years translate into today's revenue growth. Battery management systems and driver assistance revenue grew over 60% from the same quarter last year.

In the December quarter, we expect Automotive to be strongly up sequentially and up in the mid-teens from the same quarter last year. We expect the strength to come from content increases in secular growth areas, offsetting slowdown in global auto production. We expect battery management systems revenue for electric vehicles to nearly double from the same quarter last year with growth across several geographies. In addition, we expect continued content growth in driver assistance applications.

Let me next turn to the industrial market. In the September quarter, industrial was up 12% from the same quarter last year. Our growth in industrial benefited from content growth in factory automation and medical products. In our broad market business and distribution, we continue to see double-digit resales growth from the same quarter last year.

However, we began to receive weaker bookings and slower resales within a broad base of customers in the latter part of the quarter. Bruce will provide more detailed commentary on the dynamics of our distribution business. We continue to believe in the long-term growth trajectory of factory automation. We will be showcasing our latest technologies serving the digital factory at the Munich electronica trade show in November.

Our Industry 4.0 areas of focus include: first, robust interface and communications products that bring intelligence to the factory edge; second, small thermal-efficient digital isolation and isolated power and protection solutions; and third, ultra-efficient and tiny footprint power modules. We believe that we are in the early days of the deployment of industrial 4.0 control systems in factories around the world, and this movement has at least a few more decades before the market saturates. In the December quarter, we expect industrial to be strongly down sequentially. This reflects our assumption that recent weakness in bookings and resales at broad-based customers and through distribution will continue, given the uncertain environment.

Let me next discuss Communications and Data Center. In the September quarter, Comms and Data Center was up 9% from the same quarter last year. We experienced strong growth in 100G optical products for the data center, combined with slower growth in communications infrastructure. In the December quarter, we anticipate Comms and Data Center revenue to be strongly down sequentially with a temporary slowdown in 100G optical module shipments after many quarters of strong growth.

We believe we are in the middle innings in the deployment of 100G optical modules for hyperscale data centers and expect this business to return to growth in the first half of calendar 2019. Finally, let me turn to Consumer. In the September quarter, Consumer was up sequentially and up 13% from the same quarter last year. Due to continued strong performance of our broad-based business in tablets, wearables, smartphones, gaming, and peripherals.

In the December quarter, we expect Consumer to be strongly down sequentially due to seasonality. To summarize, we have built Maxim to be successful in any environment. One, we continue to grow content and generate new design wins in high-quality, diversified and long product life cycle markets, such as automotive and industrial. Two, our flexible manufacturing structure ensures consistent world-class gross margins.

Three, we continue to exert tight spending controls. And four, we have low-capital intensity in manufacturing. All of this is driving strong and predictable cash flows, giving us confidence to increase our share buyback plan during fiscal year 2019, returning 125% of our free cash flow to investors. With that, I will now turn the call over to Bruce.

Bruce Kiddoo -- Chief Financial Officer

Thanks, Tunc. We're pleased to announce that we're increasing our return on capital commitment from 100% to 125% of free cash flow for Maxim's fiscal-year 2019. The increase will all go toward incremental share buybacks for the balance of fiscal-year 2019. At the current stock price, we expect the Q2 buyback will approximately double compared to Q1.

Also our board has approved a new share buyback authorization of $1.5 billion. Our increased share buyback program reflects our strong net cash position and our belief that buying our shares is the best use of our cash in the current environment. As a result of the increased buyback during this industry slowdown, we will exit this period with greater earnings power. Let me now turn to Q1 results.

Revenue for Q1 was $638 million, up 11% from the same quarter a year ago. Our revenue mix by major markets in Q1 was approximately 28% from Industrial, 28% Consumer, 21% Automotive, 20% Comms and Data Center, and 3% Computing. Our Industrial and Automotive business comprised roughly half of our revenue in the quarter. Turning to the distribution channel.

Distribution comprised 46% of Maxim's revenue in the September quarter. We ended Q1 with 63 days of inventory in the distribution channel. Resales were up 14% from the same quarter a year ago, but resales to broad-based customers were weak. This softness affected distribution performance, primarily in the last month of the quarter.

Our delivery lead times are still five to seven weeks and have been in this range for over six years. We continue to closely manage our supply chains, our inventory in the distribution channel and our distributors' performance given the uncertainties in the industry. We remain committed to our days-of-channel inventory target of 60 days or less. Turning to the P&L.

Maxim's gross margin, excluding special items, was 68.5%, up 50 basis points from the prior quarter with the increase driven by ongoing tailwinds and onetime items. Operating expenses, excluding special items, were $194 million, down slightly from the prior quarter, reflecting continued cost controls. Q1 GAAP operating income, excluding special items, was $243 million. Operating margin at 38% of revenue is up from the prior quarter and up 280 basis points from the same quarter a year ago.

Q1 GAAP tax rate, excluding special items, was 13% above our guidance of 9% to 10%, reflecting the latest IRS-proposed rules regarding tax reform. GAAP earnings per share, excluding special items, was $0.75, up 25% from the same quarter a year ago. Turning to the balance sheet and cash flow. Overall total cash, cash equivalents, and short-term investments decreased by $63 million in the fourth quarter to $2.56 billion.

Please note that we pay out our employee bonus in Q1. Q1 inventory days ended at 124, down three days from Q4. Inventory dollars were down 2% from the prior quarter. Capital expenditures were $18 million in the quarter.

Trailing 12-month free cash flow was $915 million or 36% of revenue, which is up 12% over the same quarter last year. Our free cash flow yield is 6.7% at yesterday's closing stock price. Our free cash flow per share was $3.24. For capital return, share repurchases totaled $112 million in Q1 as we bought back approximately 1.9 million shares.

Dividends totaled $128 million in the quarter or $0.46 per share. This reflects the 10% increase in the dividend that our board approved last quarter. Based on the increase in dividend and yesterday's closing stock price, our dividend yield is 3.8%. Moving on to guidance, I want to remind investors that our second fiscal quarter last year was a 14-week quarter and was impacted by the transition to sell-in accounting at one distributor. Adjusting for both of these items, we estimate our normalized revenue in Q2 of last fiscal year was around $580 million.

Our beginning Q2 backlog was $418 million. Based on this beginning backlog and expected turns, we forecast Q2 revenue of $570 million to $610 million. Adjusting for the 14-week quarter and the sell-in accounting transition in the same quarter a year ago, the midpoint of our guidance reflects approximately 2% growth in Q2 compared to the same quarter a year ago. This is the result of continued content growth in automotive, offset by the softness we are now seeing in the broad market.

Q2 gross margin, excluding special items, is forecasted at 66% to 68% down from Q1. This is driven by one-time items that benefited Q1 and lower revenue in Q2. The modest gross margin impact from lower Q2 revenue is due to our flexible manufacturing strategy. Q2 operating expenses, excluding special items, are expected to be flat with Q1 despite the full-quarter impact of our annual merit increase due to continued tight cost controls.

Our tax rate for Q2, excluding special items, is expected to be 13%, flat with the prior quarter. 13% is our best estimate to use for modeling purposes for the balance of fiscal 2019. For Q2 GAAP earnings per share, excluding special items, we expect a range of $0.59 to $0.65. For FY '19, we expect capital expenditures to be at the high end of our targeted range of 1% to 3% of revenue as we perform required maintenance at our internal fab.

I would also like to note that we plan to pay off our $500 million bond that will come due in November. In summary, we expect modest growth in Q2 revenue compared to the same quarter last year due to our diversified end market exposure, despite uncertainty in the current environment. Our flexible manufacturing strategy enables us to maintain high profitability while mitigating the risk of building excess inventory. And we will continue to tightly control operating expenses.

All these factors result in high-quality earnings and free cash flow. Our positive net cash position allows us to increase our return of cash to shareholders from 100% to 125% in fiscal 2019. With that, I'll turn the call back over to Kathy.

Kathy Ta -- Vice President, Investor Relations

Thanks, Bruce. That concludes our prepared remarks, and we will now open the call for questions. [Operator instructions] Andrew, could we please have our first question? 

Questions and Answers:

Operator

[Operator instructions] And our first question comes from the line of Harlan Sur with JP Morgan. Your line is now open.

Harlan Sur -- J P. Morgan -- Analyst

Good afternoon. Thanks for taking my question and good to see the diversification in the business playing out here. On the guidance, industrial looks like the biggest driver of the sub-seasonal trend in the December quarter and it looks like within that it's mostly your broad markets, SMB business. Can you guys just provide us with some color in terms of which geographies you're seeing most of the shortfall? Any color on some of the sub-segments within that? And, I guess, most importantly from a bookings perspective, have the declines stabilized, thus far, here in the December quarter?

Bruce Kiddoo -- Chief Financial Officer

Hi, Harlan. This is Bruce. I'll take that. So, you're exactly right.

The biggest area for slowdown had been in the Industrial broad-based market. We've actually seen that globally. It was pretty kind of across all geographies we saw that weakness in our industrial business. We started to see that in kind of the September or late September when the bookings slowed down.

I think it's too early to make a call on whether those -- whether that stabilized or not. Obviously, we're continuing to monitor that information and manage it closely and managing our inventory in the channel and our inventory on our own books, right, to make sure we manage that closely. But we haven't seen -- I think it's too early to say whether or not that softness has stabilized or is starting to bounce back.

Kathy Ta -- Vice President, Investor Relations

Thank you, Harlan.

Harlan Sur -- J P. Morgan -- Analyst

Thank you.

Operator

Thank you. And our next question comes from the line of Ross Seymore with Deutsche Bank. Your line is now open.

Ross Seymore -- Deutsche Bank -- Analyst

Hi, guys. Wanted to dive a little bit into a similar sort of question on the automotive side. I know you have the BMS and the ADAS side as offsets, but that business growing still 15% year over year is very impressive relative to a laundry list that's quite long of negative data points further upstream from where you guys are. So, I guess, any color you could give about how the company offsets some of that with content above and beyond what you've already said Tunc.

And is that another shoe to fall similar to what your description of industrial just was to the prior question?

Tunc Doluca -- Chief Executive Officer

Yes. So, if you look at the automotive side, we have seen reports obviously of some of the Tier 1s and some of the car companies saying their growth has flattened or in some cases declined. But if you look at our business, we've had segments of it that we've been investing in. And of those segments, I think the one that will be the most sensitive to unit will be the infotainment piece and we do see that that growth is less than it was a year ago.

So, the content growth is still offsetting the unit declines, is the way that I read that in infotainment. And in the other segments, large segments that we've invested in which are BMS, or battery management systems, and in ADAS the growth there we have is much, much larger than any decrease in unit sales of cars. So, the combination of all that is ending up giving us still a good mid-teens-type growth long term. Previously we've guided everybody to be in the low-teens.

We're not really changing that. I think that that remains and basically the large content growth we're seeing plus secular growth in BMS and in ADAS systems is really letting us grow despite the fact that there is some headwinds in terms of unit car sales globally right now. So, at the current view and the view we gave of this quarter, we showed still growth year over year that was pretty healthy. Beyond that, obviously it's harder to say but our story is more of a content growth and secular growth driver story in automotive rather than the unit car sales.

Ross Seymore -- Deutsche Bank -- Analyst

Thank you.

Kathy Ta -- Vice President, Investor Relations

Thanks Ross.

Operator

Thank you. And our next question comes from the line of Ambrish Srivastava with BMO. Your line is now open.

Ambrish Srivastava -- BMO Capital Markets -- Analyst

Hi, thank you. Bruce, I was looking at accounts receivable, up 60%. That's a pretty large increase. I went back and looked at -- my model goes back all the way to pre-Dallas days and I haven't seen such a big increase.

So, what's driving that please?

Bruce Kiddoo -- Chief Financial Officer

Yeah. So, I think there's a couple of things, one, just the sort of the timing of the business and sort of the mix of business that we had. If you looked at this quarter, we had a strong consumer quarter and some of those are larger customers which get a little bit longer payment terms, and so you had a little bit mix of that business. And if you're comparing this to year over year, we actually had some timing that went the other way for us a year ago in Q1.

I would say that, we've absolutely noticed that same fact and we're aggressively working to bring down DSO back to kind of around the 40 days, which is our target, and you can expect that we'll execute on that. The other area in the working capital side is inventory, which we did bring down three days from 127 to 124 internally, but our goal is to get that down closer to our target of 110 days. And with our flexible manufacturing strategy, we're able to bring down and manage that inventory without having significant impacts to our gross margin. So, we're going to aggressively manage our working capital during this kind of soft spot in the industry.

And, of course, just by definition, right, as revenue declines, you'll see benefits on the cash flow line from AR. So, both bringing down the DSO and then the lower revenue will generate free cash flow growth for us in the next several quarters.

Ambrish Srivastava -- BMO Capital Markets -- Analyst

OK. Thank you.

Bruce Kiddoo -- Chief Financial Officer

Yes.

Kathy Ta -- Vice President, Investor Relations

Thanks, Ambrish.

Operator

And our next question comes from the line of Vivek Arya with Bank of America Merrill Lynch. Your line is now open.

Vivek Arya -- Bank of America Merrill Lynch -- Analyst

Thanks for taking my question. On the slowdown, what are your customers saying? Have they paused certain projects and those could resume whenever the macro condition stabilizes or do you think they pre-bought to get in front of tariff? And trade issues and if it's the latter and there is some excess inventory, is there a way to quantify how much you are above a normal level?

Tunc Doluca -- Chief Executive Officer

Yes. So, this is not that easy for us to see, frankly. Remember that what Bruce mentioned, and we talked in our prepared remarks, was we're seeing a broad-based customer slowdown. So, most of these customers are actually buying through distribution.

So, we're one layer removed actually from the customer and their comments. If you look at a lot of our direct customers, the larger customers, that's not where we're seeing this effect. However, I'll give you some commentary. We have asked the question to some of our automation customers and their response basically was that they are hearing that some of their end customers are kind of hesitating to build up capacity in China.

I don't know how widespread that is, but we've heard it from some customers kind of to wait and see how the tariffs clear up. But I want to caution everybody, this is not like we ran a survey and we have a lot of inputs from people. We just have a few customers saying this. And the reason for the broad-based slowdown, since we don't directly talk to them, is really hard for us to say what the underlying causes for that, but it could be the things that you mentioned.

Maybe they do have ordered inventory ahead or so on but we don't really know.

Vivek Arya -- Bank of America Merrill Lynch -- Analyst

OK. Thank you.

Kathy Ta -- Vice President, Investor Relations

Thanks, Vivek.

Operator

And our next question comes from the line of Craig Hettenbach with Morgan Stanley. Your line is now open.

Craig Hettenbach -- Morgan Stanley -- Analyst

Yes, thank you. Bruce, a follow-up question on distribution in terms of some of the slowing you're seeing there. Anything from a demand perspective versus inventory? So, as you check into that and you've seen the orders flow, what's the feedback loop in terms of maybe some slower resales versus inventory a little high that's being worked out?

Bruce Kiddoo -- Chief Financial Officer

Yes. I mean, clearly we saw resales, which were still up 14% in the quarter year over year . So, that's still healthy demand. But if you sort of parse that a little bit, clearly the very -- the smallest of those customers through distribution, that's where we saw, I think, a lot of the weakness and clearly that -- as I mentioned in the earlier question, we saw that kind of on a global basis.

The slowdown also happened kind of late in the quarter and so it's relatively new and as Tunc just mentioned, we're trying to figure out what's going on and we're talking with our distribution partners. But it's very difficult for us to get a good handle on that. I will say to the extent that in certain geographies where it's -- there's a Maxim specific story, whether that's BMS in China or automotive in Japan or gaming in Japan, those parts of our distribution business were very strong. So, automotive continues to do very well and our broad-based Consumer business is doing well also.

So, the real slowdown that we're seeing is mainly in the kind of the industrial broad-based businesses.

Craig Hettenbach -- Morgan Stanley -- Analyst

OK. Appreciate all the color. Thanks.

Bruce Kiddoo -- Chief Financial Officer

Yes.

Kathy Ta -- Vice President, Investor Relations

Thanks, Craig.

Operator

And our next question comes from the line of Blayne Curtis with Barclays. Your line is now open.

Blayne Curtis -- Barclays -- Analyst

Hey, good afternoon. Thanks for taking my question. Just sort of curious on the Comm segment. You said it pulled back and it had been strong for a couple quarters.

Just kind of curious if that should be -- the 100G market should be less cyclical, just kind of your comments on why it's pulling back and anything you can comment on as you look into the next couple of quarters in terms of design activity and any comments on 100G in general? Thanks.

Tunc Doluca -- Chief Executive Officer

Yes. So, the 100G business for Maxim has been a bright spot now for the last year, year and a half. It does had strong growth. Our products and technology were very well accepted by customers.

Nothing there has really changed in that respect. However, there are some customer issues that are unrelated to the Maxim product that's causing them to kind of take a breather for a quarter. That's what we're hearing. So, the growth has pretty much slowed down.

But we really expect from what we hear from these customers that in the first half of next calendar year, this will pick back up again and we'll return to growth. So, nothing fundamentally has changed, but there's some customer issues that are not related to us. And those are things that they don't really like us to talk about too much. So, those are good questions to the hyperscale providers, but not to Maxim.

So, nothing fundamentally wrong. I think it's going to be strong growth for the company long term.

Blayne Curtis -- Barclays -- Analyst

Thanks, Tunc.

Kathy Ta -- Vice President, Investor Relations

Thanks, Blayne.

Operator

And our next question comes from the line of John Pitzer with Credit Suisse. Your line is now open.

John Pitzer -- Credit Suisse -- Analyst

Yes, good afternoon guys. Thanks for letting me ask a question. Bruce, I know you've talked about year-over-year growth in Auto for the December quarter. And I know these adjustments from last year, Industrial being down strong sequentially.

Does that lead to like a down mid-teens year over year? Am I doing those adjustments right for the December quarter? And if that's the case, that seems to be worse than peers. So, I'm kind of curious, if you can help me kind of parse out the different buckets in Industrial. Is this really being driven by the fact that you guys are over-indexed to factory automation, and that's been an area that's been weak up the supply chain for a couple of quarters now, or can you help me understand why you would be down more than most of your peers in that bucket?

Bruce Kiddoo -- Chief Financial Officer

Yes, and I apologize to everyone. It's always very difficult to do that comparison with the adjustments due to Avnet and the 14th week, and so that's difficult and especially I didn't kind of parse it out at the sub-segment level. That said, I want to be very clear when we do that math ourselves internally, we see our Industrial business in Q2 down low single digits, right. So it is down a little bit year over year, but it's low single digits.

So, from that point of view, I think it's a little bit different than maybe the math that you did but understand it's difficult for you to be able to do that math. When we look at it, it is the broad-based business. Some of that does get included in factory automation. And that may be our speculation, as Tunc indicated, maybe just wait-and-see on some of these CAPEX projects on the factory automation side.

But again, that's just what we've heard from a couple of our customers that then sell into China, so it's tough for us to know. But overall we are seeing the slowdown in Industrial. We do see it kind of down year over year in Q2 at around kind of low single digit. And that was after -- again, it kind of held up in the first quarter kind of growing 12% year over year.

John Pitzer -- Credit Suisse -- Analyst

Thanks, Bruce.

Bruce Kiddoo -- Chief Financial Officer

Yes.

Kathy Ta -- Vice President, Investor Relations

Thanks, John.

Operator

And our next question comes from the line of Chris Danely with Citi. Your line is now open.

Chris Danely -- Citi -- Analyst

Hey. Thanks, guys. Could you just talk about where you first saw the weakness either by end market or geography? And then where have you seen the weakness most recently?

Bruce Kiddoo -- Chief Financial Officer

Yes, I'll take that. It's difficult to parse that out. I mean, again, it was in Industrial, as we said it was sort of at near -- it was the end of the quarter when we started to see that and it was broad-based and across all the geographies. So, I wouldn't say it was -- we saw it in one area first or another area.

So, and it's still pretty early and I think all of us are much better at accepting cycles backward looking, and I'm sure that will be true again through this cycle.

Chris Danely -- Citi -- Analyst

Great. Thanks, guys.

Bruce Kiddoo -- Chief Financial Officer

Yes.

Kathy Ta -- Vice President, Investor Relations

Thanks, Chris.

Operator

And our next question comes from the line of Tore Svanberg with Stifel. Your line is now open.

Tore Svanberg -- Stifel Financial Corp. -- Analyst

Yes. Thank you. So, Tunc, when you talked to some of these factory automation customers, you mentioned that they're pausing. Did you get a sense that they were kind of pausing to wait how the trade situation unfolds or are they now kind of looking at transferring manufacturing out of China and, therefore, you're starting to see the pause.

I'm just trying to understand how long this is going to last and I don't know if you have any color you could share with us.

Tunc Doluca -- Chief Executive Officer

Well, I'll share with you what I know, which is not going to be a whole lot. The -- remember it's the automation customers and we're talking about their comments about their customers. So, it's really hard to understand. But it looked like they were mostly waiting for, as you said, the trade situation or the tariff situation to resolve itself.

But as we all know, it hasn't yet. And it's not really known how long it's going to take to resolve, if ever, frankly. So, it's not really that clear whether this will be just let's wait and then we'll build the factory somewhere or let's wait and it gets resolved. I think the world is going to continue to need products to buy, so I don't think that the long-term growth in factory automation or productivity increases is going to change.

So, the demand is going to be there but right now I think a lot of customers are kind of in a "let's wait and see before you make a big decisions mode." But I don't -- I think this fundamentally does not change our belief that automation is going to be a great area for growth for Maxim for years to come.

Tore Svanberg -- Stifel Financial Corp. -- Analyst

Thank you, Tunc.

Kathy Ta -- Vice President, Investor Relations

Thanks, Tore.

Bruce Kiddoo -- Chief Financial Officer

Hey. This is Bruce. I actually just want to clarify something that came up with the earlier question on the AR. We're close to it, so I just assumed people knew.

But just make sure that there's clarification there. There is an accounting change that went into effect in our -- beginning our first quarter of fiscal year, where basically we used to report in the accounts receivable line that used to be net of any reserves associated with that. And so, the accounting change now moved that reserve down into the liability side. So, now you're seeing gross AR.

And so if you're just looking at that, you have to -- if you don't grab the reserve that's down in the liability section, then absolutely it'll look very, very large. So, you have to do an adjusted DSO calculation. I'm sorry about that, but just to get an apples-to-apples comparison. So, anyway I just wanted to clarify that point.

That said, we've -- still even on an adjusted basis, we've seen some increase in our DSO and we're working to bring that down. But certainly, if you haven't made the adjustment, it would look much, much worse than it really is. So, again, I apologize, but I just wanted to clarify that.

Tunc Doluca -- Chief Executive Officer

Yes, just for everybody to know, I mean, our terms have not changed with customers. And we're collecting as aggressively as we always have been, so nothing's changed in the fundamentals.

Operator

Thank you. And our next question comes from the line of Toshiya Hari with Goldman Sachs. Your line is now open.

Toshiya Hari -- Goldman Sachs -- Analyst

Thank you for taking the question. I was hoping you could provide a little bit more color on your consumer business. It seems like you had a pretty good quarter in September. It seems like you're guiding to a seasonal December quarter.

But curious, what kind of trends, what kind of momentum did you see at your large smartphone customer? What are your expectations with that customer going into December and perhaps into the early part of 2019? And other parts of consumer, where I think you've done a great job in diversifying your application and customer mix over the past couple of years. How sustainable is growth in that business over the next year or so? You guys talked about wearables, tablets, gaming. Wearables and tablets are necessarily growthy markets, if you will. And in gaming, I think one of your larger customers just had a very huge product cycle.

So,curious how you think about sustainability there. Thank you.

Tunc Doluca -- Chief Executive Officer

Yes, so actually you answered most of the questions yourself, which is great. So our strategy has been, as you well put, to diversify the consumer business and to broaden both the customers, the markets we're getting into, and the types of products that we sell. And we've made good headway in that, now we have a broader base, customer base. And we are selling into all the markets you mentioned, into tablets, wearables some gaming products, many other broad-based applications.

So, that is going well. With our largest customer obviously, we still have a good relationship. We have -- and they plan to still continue to make smartphones. So, we'll have some business there in the company.

But always remember that our philosophy here is to broaden that business as much as we can which gives us more stability and less changes from year to year. And also make sure that our goals to have a business that we can rely on in terms of cash flows is going to be there. So, I think we've made great progress. We've been reporting about it for a while now.

And your questions about the largest customer, the relationship is good. It's very healthy. And as we do each year, we have to win the business every year and that for that market there's no change.

Bruce Kiddoo -- Chief Financial Officer

Yes, this is Bruce.

Toshiya Hari -- Goldman Sachs -- Analyst

Thank you.

Bruce Kiddoo -- Chief Financial Officer

This is Bruce. Just to add on to what Tunc said. While that relationship with our large customer is good, we still expect that customer to be less than 10% for this fiscal year. And then also just to reiterate what Tunc said, I think it's important for people to understand with this broad-based business, they're all kind of small wins.

And yes, we're going to win and lose some of those but to the extent that we continue to kind of leverage our power management, our audio products across this broad base, we think that's what allows us to deliver sort of this very broad-based stable Consumer business. And as you said, even with the second quarter seasonally down, we still expect it to be up in sort of the low to mid-single-digits year over year. So, I think that's just evidence of the kind of the transformation we've done within our Consumer businesses.

Toshiya Hari -- Goldman Sachs -- Analyst

Very helpful. Thank you so much.

Bruce Kiddoo -- Chief Financial Officer

Yes.

Kathy Ta -- Vice President, Investor Relations

Thanks, Toshiya.

Operator

And our next question comes from the line of CJ Muse with Evercore. Your line is now open.

CJ Muse -- Evercore ISI -- Analyst

Yes, good afternoon. Thank you for taking my question. I guess a two-part question. First one, are you seeing stronger dollar weakening in emerging currencies as a headwind, have customers discussed that? And then secondly, as you think about the higher tax rate versus that 9% to 10% you were thinking before, is that a function of more U.S.

revenues expected in the mix in fiscal '19? And should we think about that 9% to 10% as we move into fiscal '20? Thank you.

Bruce Kiddoo -- Chief Financial Officer

Sure. So, the first question on the currency, 99% of our revenue is in dollars. And so from that point of view, we haven't -- that doesn't impact us and even for our customers that translate, like some of our distribution partners, that the currency has not come up. So, we don't see that as an issue for us.

On the tax side, the reason it came in at 13% versus our guidance of 9% to 10%, when we guided in July, it was based on our best understanding of the kind of the new tax reform laws. The IRS subsequently released kind of proposed rules in September that countered some of our assumptions. And then we ended up at around the 13%. We do expect that 13% based on what we know is kind of the best estimate to use for modeling going forward and it was really about just learning -- getting all the rules out there.

It wasn't about mix of our business or anything related to operational aspects of the business.

Tunc Doluca -- Chief Executive Officer

Yes, one other thing on the currency aspect. As Bruce said, most of our sales are in dollars, so it doesn't matter for us. But obviously changes in currencies of different countries do affect the sales of their end products to their customers and their competitiveness. However, Maxim is a global company, so we're pretty much selling to all these customers.

So, who wins or loses doesn't affect us that much. So, this is really not on our radar as a concern or something to think about.

CJ Muse -- Evercore ISI -- Analyst

Thank you.

Kathy Ta -- Vice President, Investor Relations

Thanks, C.J.

Operator

And our next question comes from the line of Chris Caso with Raymond James. Your line is now open.

Chris Caso -- Raymond James Financial Inc. -- Analyst

Yes, thank you. Good afternoon. Just a question with respect to guidance and how much of -- within that guidance the weakness you're attributing to end demand as compared to inventory? And I know that is probably easier to answer with respect to the distribution channel and end market customers. You said, I think, that the distributor inventory was 63 days, which is ahead of your target.

How fast do you expect to get that within your target levels and how much of a headwind does that present?

Bruce Kiddoo -- Chief Financial Officer

Yes. Certainly, we're committed to our target of 60 days or less and we're always working to achieve that. I would say the biggest wild card for us on that is resales, right, and the ability to forecast that, especially when we're still kind of in early days of this softness that we're seeing. So, it's difficult for us to predict, say, this quarter on where channel inventory will be.

Absolutely our commitment over the long-term, medium term is to get that number to 60 or less and we absolutely will get there. So certainly, and that's something we'll report every quarter and you can track our progress against that.

Chris Caso -- Raymond James Financial Inc. -- Analyst

Got it. Thank you.

Bruce Kiddoo -- Chief Financial Officer

Yes.

Kathy Ta -- Vice President, Investor Relations

Thanks, Chris.

Operator

And our next question comes from the line of Amit Daryanani with RBC Capital Markets. Your line is now open.

Amit Daryanani -- RBC Capital Markets -- Analyst

Thanks for taking my question guys. So, I guess, if I hear this correctly, you guys are talking about the slowdown really being more or less Industrial-centric at this point. So, I'm wondering if you kind of just think back to the past cycles in '13 and '15, is it rare for a correction to be happening in just one end market versus perhaps spreading to other segments? If you just maybe help me understand your conviction on how this is Industrial-specific where's the risk that you expect in your other market? And then how would you react if this is a more widespread correction across your further markets?

Tunc Doluca -- Chief Executive Officer

Yes. So, as you pointed out, we've obviously been through a few of these cycles before. And what I can say is my experience has been that, each one of them is a little bit different than the previous one. So, it's too early to compare or build a model saying this cycle looks like the previous one.

So, let me just make sure that that's clear. The things that we do know is that since we've been through a few of them, both Bruce and I, we know how to manage through these cycles. We know what to do in terms of making sure the company does well. Compared to prior cycles, I think Maxim is much better able to be successful, mainly because we're more diversified in our revenue base.

We have a better profitability model and our gross margins are much less sensitive to volume. Now, your question about will it spread to other areas from Industrial? Yes, there's some background sound there which...

Bruce Kiddoo -- Chief Financial Officer

Maybe the caller could mute?

Tunc Doluca -- Chief Executive Officer

Yes, mute. All right. Thanks. So, in terms of, will it spread into the other markets? It's really difficult for us to assess that.

But the important thing to realize is that a bigger portion of our small customer or broad customer revenue is coming from our Industrial customers. So, there's fewer revenue that's going through small customers in other markets, frankly. So, that's one point. And the other one that's -- I think most people have already heard about is unit sales of cars that's kind of slowed down a little bit, but we're -- as I said, we're pretty immune to that one.

So, I think that we'll be doing fine in that area. So, hard for us to predict and each cycle is a little bit different, but I think we'll do well in the cycle if it extends or gets more concerning or more.

Amit Daryanani -- RBC Capital Markets -- Analyst

Thank you.

Bruce Kiddoo -- Chief Financial Officer

Yes. And this is Bruce, just to add on exactly what Tunc said, it's always difficult to predict. But as he said, I think we're much better positioned to do well and I think our strong cash position, strong cash flow going forward really allows us to increase our buyback during this period and really buyback our shares in potentially a weak environment, which we think is, by far, the best investment of our cash. And absolutely, we believe, we'll come out stronger on the back end of this cycle, however long it lasts because of the strength of our business model, the strength of our cash flow, and our commitment to use that to invest in Maxim because we believe that this is a company with a very strong long-term value proposition.

Kathy Ta -- Vice President, Investor Relations

Thank you, Amit.

Operator

And our next question comes from the line of Srini Pajjuri with Macquarie. Your line is now open.

Srini Pajjuri -- Macquarie -- Analyst

Thank you. Bruce, I have a question, I want to go back to the inventory comment. So, as you bring down your channel inventory, could you talk about what your plans are for your own balance sheet inventory? And it looks like you're bringing that down as well. My question is does it make more sense to actually carry a bit more inventory on your own balance sheet as opposed to in the channel given the environment? And then if you were to bring down your own balance sheet inventory, how much of a headwind is that to your gross margins and how should we think about it? Thank you.

Bruce Kiddoo -- Chief Financial Officer

Sure. And I think most people who know me know I hate inventory. I just think it's a result of inefficiencies in the supply chain. And what we've done is by moving to a flexible manufacturing strategy, I think we have that ability to react both on the upside and the downside to changes in demand.

And so absolutely I think we got a little bit ahead of ourselves when we got to 127 days last quarter and I stated that very clearly. And we're committed to bringing that down. We brought it down three days this quarter to 124. And absolutely, our goal, if you look at our internal plan, are to continue bringing that number down irregardless of the demand environment.

And because of that flexible manufacturing strategy, we don't expect that that will be a big headwind on gross margin. Obviously, there's some. I had said kind of publicly in prior occasions that we did sensitivity analysis and we said that if there was a 10% decline in revenue, it might be a 1% to 2% impact on the gross margin. And here you can see in this quarter, we're down about 7.5% sequentially and we're seeing about a 1 point impact to gross margin as a result of that.

So, overall, we feel like the strategy we undertook a few years ago when we transferred the company is the right strategy throughout a cycle both good and bad and we feel comfortable with that and we're absolutely committed to bringing down inventory, both off our balance sheet and within the channel.

Srini Pajjuri -- Macquarie -- Analyst

Thank you.

Bruce Kiddoo -- Chief Financial Officer

Yes.

Kathy Ta -- Vice President, Investor Relations

Thank you, Srini.

Operator

And our next question comes from the line of Christopher Rolland with Susquehanna. Your line is now open.

Christopher Rolland -- Susquehanna International Group -- Analyst

Hey, guys. As we look at semis guide this season we're getting a pretty big difference between companies. And it seems like those companies that were kind of notorious for longer lead times are guiding better and those with shorter lead times, like you guys, or QI, let's say, are having a little bit more challenging 4Q. And I guess I'm wondering those with short lead times like yourself, do you think maybe you guys are taking lumps a quarter earlier than the others or perhaps just the correlation to lead times is more of a coincidence.

Just any thoughts you guys might have there would be great.

Tunc Doluca -- Chief Executive Officer

Yes, that's probably a good model to build after the cycle is over. But we don't really have enough insights into how the companies are working down their longer lead times, when they get to see this versus those with short lead times. My intuition would say short lead time companies would probably see it quicker, but we -- I don't have any data to back that up.

Christopher Rolland -- Susquehanna International Group -- Analyst

OK. Thanks, guys.

Kathy Ta -- Vice President, Investor Relations

Thank you, Chris.

Operator

And our next question comes from the line of Cody Acree with Loop Capital. Your line is now open.

Cody Acree -- Loop Capital Markets LLC -- Analyst

Thank you, guys, for taking my questions. Bruce, with your 63 days of channel inventory and your target of less than 60, do you get a sense in talking to distributors that this is likely to linger into the March quarter or are you comfortable that just getting within that kind of 60-day range is going to be a sufficient leanness of the channel inventory?

Bruce Kiddoo -- Chief Financial Officer

Yes. I mean, it's very difficult for us to understand how long this will last. So, I think from that point of view, I don't think we have any unique insights there. We're just managing it based on what we're seeing and working to pay close attention to resales and adjust shipments appropriately to find that right balance between supporting the appropriate level of inventory.

Because as I said, part of our distribution is supporting Automotive, which is doing well, right, part of it is supporting some of the similar broad-based Consumer businesses that are doing well. And so with the flipside being we need to closely manage the inventory for like the Industrial and broad-based businesses. So, we're trying to find that right balance, while bringing it down to the 60 days. As I said, I think it's very difficult with -- in the current flux of the current environment to predict exactly when that's going to happen.

My commitment is, we absolutely will continue to work on that and get to that level. The exact quarter really depends on the environment and what happens with resales.

Cody Acree -- Loop Capital Markets LLC -- Analyst

Great. Thank you.

Bruce Kiddoo -- Chief Financial Officer

Yes.

Kathy Ta -- Vice President, Investor Relations

Thanks, Cody.

Operator

Our next question comes from the line of Ross Seymore with Deutsche Bank. Your line is now open.

Ross Seymore -- Deutsche Bank -- Analyst

Hi, guys. Thanks for letting me sneak in a follow-up here. Just two somewhat housekeeping items. Bruce, you mentioned that the gross margin had some one-timers in the fiscal first quarter.

I was hoping you could size that. And when you talk about OPEX controls, just talk about the variability of what you guys can do in OPEX if revenue does get worse as we head into the first half of calendar '19.

Bruce Kiddoo -- Chief Financial Officer

Yes. Hi, Ross. So, the one-time benefit was about 50 bps so that 68.5%, about 50 bps was the one-time and then to go from the 68% to the 67%, the midpoint of our guide is sort of that 1 point that I talked about around the revenue impact. Concerning OPEX, clearly we've said that we're going to keep it flat in the second quarter and that's despite -- it's about a $3.5 million impact of our annual salary adjustment that happen in the September quarters and that you get a full quarter impact.

So, we're already offsetting that number in the quarter. And we'll do our normal -- we'll look at the kind of the discretionary spending first, right, incremental headcount add, travel. If this extends over time, Tunc and I have been through these cycles many things, we have the playbook. We know exactly how to work through that.

So, we're confident that we'll be able to manage OPEX appropriately. I do want to say we'll make sure we continue to invest in those important businesses for us, right, the high-growth areas that we talked about whether that's Automotive, factory automation, the Data Center, broad-based Consumer. But that said, within a large company, there's always opportunities to manage our cost appropriately and I think over the years, we've shown that we're pretty good managers in that area.

Ross Seymore -- Deutsche Bank -- Analyst

Thank you.

Bruce Kiddoo -- Chief Financial Officer

Yes.

Kathy Ta -- Vice President, Investor Relations

Thanks, Ross.

Operator

[Operator instructions] And our next question comes from the line of Vivek Arya with Bank of America Merrill Lynch. Your line is now open.

Vivek Arya -- Bank of America Merrill Lynch -- Analyst

Thanks for the follow-up. Bruce, maybe just again on the gross margins, so it's 67% without the one-time. So that would be kind of flat year on year even though sales are up? Anything going on there? Was it just a different mix than you anticipated?

Bruce Kiddoo -- Chief Financial Officer

No. To be honest, I'll have to look at that and I'll get back to you on a year over year because generally our gross margins have been trending up over time and we've seen that strength, so -- but I'll get back to you on the follow-up question.

Vivek Arya -- Bank of America Merrill Lynch -- Analyst

OK. Thank you.

Bruce Kiddoo -- Chief Financial Officer

Yes.

Kathy Ta -- Vice President, Investor Relations

Thanks, Vivek.

Operator

Thank you. And that concludes today's question-and-answer session. I would now like to turn the call back over to Kathy for closing remarks.

Kathy Ta -- Vice President, Investor Relations

Thank you, Andrew. That concludes today's conference call. Thank you for your participation and for your interest in Maxim.

Operator

[Operator signoff]

Duration: 56 minutes

Call Participants:

Kathy Ta -- Vice President, Investor Relations

Tunc Doluca -- Chief Executive Officer

Bruce Kiddoo -- Chief Financial Officer

Harlan Sur -- J P. Morgan -- Analyst

Ross Seymore -- Deutsche Bank -- Analyst

Ambrish Srivastava -- BMO Capital Markets -- Analyst

Vivek Arya -- Bank of America Merrill Lynch -- Analyst

Craig Hettenbach -- Morgan Stanley -- Analyst

Blayne Curtis -- Barclays -- Analyst

John Pitzer -- Credit Suisse -- Analyst

Chris Danely -- Citi -- Analyst

Tore Svanberg -- Stifel Financial Corp. -- Analyst

Toshiya Hari -- Goldman Sachs -- Analyst

CJ Muse -- Evercore ISI -- Analyst

Chris Caso -- Raymond James Financial Inc. -- Analyst

Amit Daryanani -- RBC Capital Markets -- Analyst

Srini Pajjuri -- Macquarie -- Analyst

Christopher Rolland -- Susquehanna International Group -- Analyst

Cody Acree -- Loop Capital Markets LLC -- Analyst

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