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Maxim Integrated Products (NASDAQ:MXIM)
Q4 2019 Earnings Call
Jul 30, 2019, 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 fourth-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 of Investor Relations

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 Tunç Doluca and Chief Financial Officer Bruce Kiddoo. As part of our usual process, we have posted a supplemental financial presentation into our external investor relations website.

The information in this presentation accompanies the financial disclosures in our earnings press release and on this conference call. During today's 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 SEC filings. Investors are cautioned that all forward-looking statements in this call involve risks and uncertainty and that future events, may differ materially from the statements made.

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

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. If we were to summarize last quarter's results and our outlook, our June quarter results met our expectations, while reduced 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 the 4% increase in our dividend 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 accept our September to be lower than seasonal due to lower revenue from Samsung, Huawei and battery management systems' customers. I'll next provide color by end market, and I will start with automotive. In the June quarter, our Automotive business was up 2% from the same quarter last year despite a significant year-over-year decline in global car production. This decline impacted our infotainment and auto body electronics businesses, and 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 an 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 demands 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 for parking assistance.

Over the last few years, we have won surround-view sockets at nine Chinese OEMs, some of whom have started production with our products. In China, we also have design-win traction for our next-generation serial link products that enable high-resolution displays and camera systems. The first of these customers have started receiving production shipments of these serial link products. Additionally, for automotive lighting, we are introducing new products for LED-adaptive lighting applications, as well as driver monitoring systems.

Maxim's products were driving monitoring work with our serial link technology for ADAS applications that comply with the highest automotive safety integrity loss. These new LED 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 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 soft demand environment. Within distribution, global resales were seasonally up. In the September quarter, we expect continued seasonality in industrial and roughly flat sequential resales in distribution, with the overall business at a significantly lower level than last year.

We remained disciplined with channel inventory as we maintained 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 lower demand for 100G laser driver products for optical modules used in hyper scale intra-data center applications. Year-on-year revenues also declined in a broad base of building block products. In the September quarter, we anticipate comms and data center revenue to be down sequentially with strong growth in 100G laser driver shipments offset by declines at Huawei and weakness in a broad base of building block products. Our customers are indicating that their excess inventory of 100G laser drivers and modules has been reduced, and we are starting to see customers placing orders for our products.

Finally, let me turn to consumer. In the June quarter, consumer was down 7% from the same quarter last year. The weakness in smartphones, partially offset by growth in 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 the 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 head -- the smartphone headwind, we expect consumer to be up sequentially due to growth in our broad base consumer business in 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 content and new design wins in long product life cycle end market, such as automotive and industrial. Our analog business model and flexible manufacturing strategy enables 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 -- to recognize Bruce's contributions to me and to Maxim. I feel very fortunate to have had Bruce, at my side, as a trusted partner for over 11 years.

He's been instrumental in driving many of our initiatives and together we've structurally improved 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 while 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.

Bruce Kiddoo -- Chief Financial Officer

Thanks, Tunç. 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's successful run as CFO of IDT 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, in line with expectations, up 3% sequentially and down 12% from the same quarter a year ago. While this is clearly the 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 period. In fiscal 2019, we exceeded our commitment to return 125% of free cash flow to shareholders. Today, we announce that we will increase our dividend by 4% despite the soft business environment. In fiscal 2020, we plan to, again, return 125% or more of 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% comm and cata center and 4% computing. Our industrial and automotive businesses comprise 54% of our revenue in the quarter. Starting in Q1 -- starting in our Q1 earnings report, we will be using an automated system to map 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 being, all of today's commentary references the existing mapping.

Also, because the computing segment is small and is not an R&D focus area for Maxim, next quarter, we will be combining computing with the communications and data center 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 Maxim's revenue in Q4. I'm 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 their 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 in the current uncertain environment. We're committed to maintain our current channel inventory around 60 days. Turning to the P&L.

Maxim's 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 $0.57, 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 one-time 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 $102 million in Q4 as we bought back approximately 1.8 million shares. Dividends totaled $125 million in the quarter based on yesterday's closing stock price and our increased dividend of $0.48 per share, our dividend yield is 3%.

Our beginning Q1 backlog was $391 million. Based on this, beginning backlog and expected turns, we forecast Q4 revenue of 510 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 180s 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 $0.46 to $0.52. For FY '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've returned 132% of free cash flow in fiscal 2019.

In fiscal 2020, we again plan to return 125% or more of 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 of 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. I am 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 Tunç, Brian and the 7,000 Maxim employees will continue to maximize value for all our stakeholders. Thank you. And with that, I'll turn the call back over to Kathy.

Kathy Ta -- Vice President of Investor Relations

Thanks, Bruce. That concludes our prepared remarks, and we will now open the call for questions. We'd like to continue the same Q&A process that we'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?

Questions & Answers:


Operator

[Operator instructions] Our first question comes from the line of Ross Seymore from Deutsche Bank. Your question please.

Ross Seymore -- Deutsche Bank -- Analyst

Hi, guys. Thanks for letting me ask a question. And before I do that, just wanted to say that, congrats, and goodbye, Bruce. It's been a pleasure working with you.

So for Tunç and/or Bruce just wanted to talk about 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 whether you want to split it into the various end markets or just in aggregate, can you just talk about what changed from one quarter to next? Is it just the China trade? Is it Huawei? If you want to size that? Or are there other dynamics that we should appreciate?

Tunc Doluca -- Chief Executive Officer

So Ross, I'll take that one and Bruce can add if he wishes. So we did say that the demand seems to stabilize. We didn't say there was a rebound last time. The demand is stabilized at a lower level than it's used to, and it remained 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'm going to mention, 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 going to help out. But the comms infrastructure and there's broad base weakness on the communication side, and this is impacted a lot by Huawei. So in essence, on Huawei, we have -- for most of our products, we actually are able to shift, but Huawei is 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're kind of roughly having an effect of about $10 million or so in the quarter. And in consumer, our broad market business is up strongly, which is good in tablets, variables and gaming.

But this is offset by lower content in Samsung phones. So those three effects combined which were, just to remind you again, BMS uncertainty, Huawei uncertainty, and the Samsung content and unit introduction may contribute about $30 million or so. So that's the biggest weakness that you are seeing, but the rest of it is kind of seasonal, kind of pretty similar to what we've said in the previous quarter. Hope that gave you some color.

And Bruce, I don't know if you want to add anything.

Bruce Kiddoo -- Chief Financial Officer

No. I think you said it well, Tunç. I will just add, three-year seasonality for the September quarter, it's flat. And it's actually really pretty consistent there, so we would have started at about 560,  it has been normal.

And then there's kind of the 30 million  a third, a third, a third that Tunç just outlined. That really kind of put us where we are at today.

Ross Seymore -- Deutsche Bank -- Analyst

Yeah. Thank you

Operator

Our next question comes from the line of Harlan Sur from JP Morgan. Your question please.

Harlan Sur -- J.P. Morgan -- Analyst

Good afternoon and thanks for taking my question. And Bruce, thank you very much for all your support over the years and I wish you well in retirement. To follow-up on the last question, maybe this is more specifically an industrial. 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 this December quarter, kind of seasonal, but that seems to be off of the June quarter that was a bit weaker than expected. So can you just help us understand, maybe a little bit more in detail, what happened from back in late April when factory automation trends were picking up, you were seen broad recovery across some of the geographies. I think even your SMB catalog business was 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?

Bruce Kiddoo -- Chief Financial Officer

Yeah. So when we look at our industrial business -- and 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 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 it did come in a little bit weaker. And as we saw the overall business, and clearly, our order patterns have stabilized, but we haven't really seen a pickup in industrial. As similar to what we did in the March quarter, we brought channel inventory down again, right? 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 under-shipping demand in order to aggressively get our channel inventory down. So I think it's just a combination of, we haven't seen 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 a lower level combined with managing channel inventory, really kind of resulted in 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 unusual there.

The challenge, of course, is it's offset much lower base and I think we are looking for when that balance's going to come back, and I think we haven't seen that yet.

Tunc Doluca -- Chief Executive Officer

Yeah, we haven't seen it yet. Yes, let me add a little bit to that. So we haven't seen that yet. We've probed a few customers to see how they're doing on their inventory levels.

And some of them are -- they're still saying they are working down inventory, by the way, and they expect that those inventory reductions 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 asked, but that's the answer that we got.

Harlan Sur -- J.P. Morgan -- Analyst

Great. Thank you.

Operator

Our next question comes from the line of Ambrish Srivastava from BMO. Your question please.

Ambrish Srivastava -- BMO Capital Markets -- Analyst

Hi. Thank you very much. And Bruce, thanks. It's been a pleasure.

Wish you all the best and you're 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 is 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? It looks like definitely more prolonged downturn than you might have been thinking 90 days ago.

Bruce Kiddoo -- Chief Financial Officer

Yeah. 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 around about 3.6% capex as a percent of revenue. And we had identified that we were making some uptake to our loan remaining quiz to the electrical systems, to the water systems.

And so we were spending that money in FY '19 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 four 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 had an impact. I think it's maybe 20, 30 bips. So that's just one of the reasons, certainly, that's causing us not to be quite as strong as we have before.

Obviously, the lower revenue in our desire -- you saw that 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 to 114. So again, that's 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 as revenue comes back from a margin point of view.

Ambrish Srivastava -- BMO Capital Markets -- Analyst

Thank you. 

Operator

Our next question comes from the line of someone from Vivek Arya from BMO – B of A, sorry. Your question please.

Jamie Zakalik -- Bank of America Merrill Lynch -- Analyst

No problem. This is Jamie Zakalik on for Vivek. Could you talk a little bit about the competitive environment in the BMS market. Do you see increased competition in that market? And is the weakness in the September quarter due also to this macro softness that you're seeing? Or could it be more competitive positioning?

Tunc Doluca -- Chief Executive Officer

Yeah, so I'll comment about that. This is Tunç. So first of all, BMS is part of the Automotive market where market share changes relatively slowly, so you don't really see it in one or two quarters. The -- we've grown the BMS business significantly over the -- I don't know if you recall, but last -- in the second half of last year, we were talking about year-over-year growth rates that were 50 to 75%, which is huge.

What's changed now is the fact that there's been a change in the way the subsidies are paid out in China. And we think that that will have maybe a dampening of the sale of the cars, and taking that into consideration, we reduced our forecast for that market. Now having said that, No. 1, we're still growing in the mid-20s year over year.

I would still a 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 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 competitiveness, I think we have a strong product portfolio. The products are very robust and in terms of ASIL D or safety requirements that our customers like that, plus the fact that we have tremendous history with the products. They have been used for years by our customers, which means that there's less risk from a customer standpoint. So this is -- I hope that I gave some color on what it is that caused us to essentially forecast BMS revenue to be down quarter over quarter.

As I said before, it's still up, mid 20% year over year. Hopefully, that helps. Thank you, Jamie.

Operator

Our next question comes from the line of Craig Hettenbach from Morgan Stanley. Your question please.

Craig Hettenbach -- Morgan Stanley -- Analyst

Yeah, thank you. 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.

Tunc Doluca -- Chief Executive Officer

We -- you're talking about the design win activity? Is that -- you're asking about that, I assume?

Craig Hettenbach -- Morgan Stanley -- Analyst

Yes.

Tunc Doluca -- Chief Executive Officer

No, we are 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 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 a slowdown that we're observing, the design of new generation of factory automation products at our customers continues to be very robust.

Craig Hettenbach -- Morgan Stanley -- Analyst

Got it. Thank you.

Operator

Our next question comes from the line of Blayne Curtis from Barclays. Your question please.

Tom O'Malley -- Barclays -- Analyst

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's 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 to better give us the feel of how you guys are viewing the end of the year -- the calendar year?

Bruce Kiddoo -- Chief Financial Officer

Yeah. And so, I think we all know, this isn't a normal time period right now. And so, from that point of view, but I mean you just -- as the highest level kind of by the end market, if you look back historically, usually consumer is seasonally down after a strong September. And we're seeing certainly a good September, take out Samsung, and our broad base business is doing very well.

Industrial is usually, kind of, seasonally flat. And -- but again, we've talked about the industrial business, where it's kind of waiting, it's kind of very stable, but we haven't seen the rebound yet. Automotive is usually seasonally up as people start shipping in advance. And then, of course, comms and data center is not seasonal.

And that's going to be depended on what's happening to this kind of rebound or this kind of start of reordering on the data center continue. And then, of course, what happens with Huawei 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. Thank you, Tom.

Operator

Our next question comes from the line of John Pitzer from Credit Suisse. Your question please.

John Pitzer -- Credit Suisse -- Analyst

Yeah. Good afternoon, guys. Thanks for letting me ask a question. Bruce, thank you for all the help through the years and enjoy the retirement.

I guess my question going back to the consumer market and the smartphone market in general. I guess despite really good efforts to diversify away from smartphones and 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 a customer that you still think is important to support going forward? Or help us understand, can you reallocate resources or take further cost out of the model as you continue to try to deemphasize that part of the business?

Tunc Doluca -- Chief Executive Officer

Well, from an -- OK so your questions are more about R&D investment. I mean in essence, at that 1 large customer, we've got sockets where we add value and our customer cares about it. The level of investment that's required on this -- we have some big programs, not really very high. Our resources, our R&D investment really has been mostly in product lines that are more general-purpose and diversify to all the other markets that we talk about, like hearables and variables and peripherals and gaming and so on.

So a lot of the shifts 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's higher for short-lived products in terms of returns than our other product areas. So really, we don't see a need to really make some major investment changes in terms of research and development.

And most of our investments have been in other areas of Consumer for a while now. So I think the changes, maybe, you're suggesting are kind of behind this already in terms of what we've done in the past year or so.

Bruce Kiddoo -- Chief Financial Officer

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, variables, tablets, was up 30% quarter over quarter. So we did see some strong growth there.

And when we look at the September quarter, again, we're seeing, sort of, our consumer business at Samsung up 15% sequentially, so we are seeing that. And, again, that assumes that we made that shift in R&D and focus several years ago, and we're seeing that benefit. Obviously, as we've kind of taken this step from Samsung being a, kind of, roughly called -- 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's -- it's working very effectively as we are able to continue to compete consumer flat and sequentially in June and still grow it in September despite the significant takedown from Samsung.

Thank you, John.

Operator

Our next question comes from the line of Matt Ramsay from Cowen. Your question please.

Josh Buchalter -- Cowen and Company -- Analyst

Hi. This is Josh Buchalter on behalf of Matt. 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've taken here? And how your fab-light model plays into this. And also, assuming that we're now shipping closer to end demand you should -- current levels represent roughly the bottom.

Bruce Kiddoo -- Chief Financial Officer

Yeah. So I think if you look at gross margin and part of our transformation was -- we really went from a company that when I joined almost 12 years ago, we were about 85, 90% internal fab-sourced, and today, we are 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 were this 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 outsourced model, for that same 10% drop in revenue, we loose 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 -- we're 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 DOI at the same time, right? And so, we're starting late for this below demand.

And then we've seen 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 our range of 67 to 70%. We can get -- we think we get back there, something, a little bit over 600 million and feel good about that.

And we believe that the growth drivers or the tailwinds for our gross margin are still absolutely in place, right? Whether that continuing to drive put more wafers through our long fab up in Oregon, whether that through kind of been 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 are able -- in sort of the current environment, we are still at 64, 65%, 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 backup as revenue inevitably returns.

Josh Buchalter -- Cowen and Company -- Analyst

Thank you, guys.

Operator

Our next question comes from the line of Tore Svanberg Stifel. Your question please.

Tore Svanberg -- Stifel Financial Corp. -- Analyst

Yeah. Thank you. Welcome to Brian. And congratulations to Bruce, you're an exemplary CFO and really appreciate you over all these years.

I had a question back on distribution. It just feels a little bit like the disti channel is trying to lower inventories perhaps even more than where demand is. I mean I know, obviously, your resales were pretty strong, but am I sort of perceiving that the wrong way?

Bruce Kiddoo -- Chief Financial Officer

I think, candidly, I think, our senses were 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, I would say, in some situation, 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 it's in gaming, and as the data center starts to come back. So we've -- I would say that that push to kind of manage inventory within the kind of the area of around 60 days is more from Maxim.

And especially, on a sell-in basis, you just don't want to get caught with too much inventory in a cyclical business. And -- so we've been managing that. And as you said, basically, we had good resales, up 8%, normal seasonality is up 5. So I think that was positive.

And we've pretty much saw strength. China was up 14%, Japan, up 16%, Taiwan, up 6%. These were -- Asia was reasonably comfortable from that point of view. And we just used that opportunity to kind of manage our shipments in, in order to bring down the overall channel DOI.

Tore Svanberg -- Stifel Financial Corp. -- Analyst

Very helpful. Thank you.

Bruce Kiddoo -- Chief Financial Officer

Yep. Thank you, Tore.

Operator

Our next question comes from the line of Toshiya Hari from Goldman Sachs. Your question please.

Charles Long -- Goldman Sachs -- Analyst

Hi guys. Thanks for taking the question. This is Charles Long on for Toshiya. And also Bruce, congrats.

Good luck in all your future endeavors. I just had a quick question on the overall 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?

Tunc Doluca -- Chief Executive Officer

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 took quite a while, multiple quarters, to actually work itself down. So what we're seeing from the module customers that we sell into and then the module customers sell to the hyperscale end customers, they're pretty much indicating to us that their inventory levels are now coming back to normal, and they've started placing orbs. So that is not a direct implication about the hyperscale customers because there's another, somebody else in the way that's also billing inventories. 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 all we can really say.

Charles Long -- Goldman Sachs -- Analyst

Got it. Thank you.

Tunc Doluca -- Chief Executive Officer

Thank you, Charles.

Operator

Our next question comes from the line of Mitch Steves from RBC Capital Markets. Your question please.

Mitch Steves -- RBC Capital Markets -- Analyst

I just wanted to circle back to the auto and industrial piece. I think there is a little bit of concern that that's going to, kind of, be a longer, I guess, semi cycle downturn and then there's a lot of concern around the, kind of, share shift. So how would I think about you guys in current position Auto and industrial. Do you guys think you're gaining share in that space? What do you think the underlying growth rate is for both those end markets?

Tunc Doluca -- Chief Executive Officer

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 project that we still will grow faster than market growth, mainly because of two major growth drivers for us. One of them being the BMS market and the second one being the serial link products, or the ADAS products, that the company is making. So those two, I think, are 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 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 automotive, we're going to do well -- but especially in markets where we have 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 negative growth period. But I think eventually people will buy cars, so it will recover. 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 grows.

Mitch Steves -- RBC Capital Markets -- Analyst

Got it, perfect. And then, just a quick clarifying on what you guys think how long this cycle is going to last, turns into auto industrial?

Tunc Doluca -- Chief Executive Officer

So that is -- that's always a dangerous thing to predict. 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 -- but those factors are bringing what's happening with trade, what's going on with China. Those are all kind of affecting both the automotive par, as well as the industrial part of the business significantly. So we were not going to -- of course, Bruce can take this risk and predict it, but from my point of view, it's 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 a three-month view.

And we ask questions to our customers about inventory levels because -- and 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, but it will end someday. Thank you, Mitch.

Operator

Our next question comes from the line of CJ Muse from Evercore. Your question please.

CJ Muse -- Evercore ISI -- Analyst

Yeah. Good afternoon. Thank you for taking the question. And Bruce, let me echo everyone else's thoughts.

You'll be missed. Quick follow-up question on Huawei. You talked about into September, declines at Huawei, as well as weakness broad-based products. I'm just curious here, you also said that you're able to shift most products to Huawei.

So do you have disproportionate share to Huawei? Or is the entire supply chain influx given the uncertainty of whether business will move to 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 to end demand and growth drivers there going forward?

Bruce Kiddoo -- Chief Financial Officer

Yeah. So I mean when we think about Huawei, and we've said this before, they're about 2% of revenue. I think about that kind of like 50 million a year, kind of, number. We were able to -- as Tunç said, we've been generally able to ship product, kind of, within the rules, and in essence, didn't seen much impact in the June quarter.

When we look at September and we kind of talk to Huawei and talk within the channel, what we see is, basically, Huawei is trying to, kind of, sort through their supply chain and try to figure out what backlog do they want to play. And I think it's the whole combination. What's their demand? What's their inventory level? Just the availability of the entire BOM and we just saw a lot of uncertainty there. And so, in essence, we almost zeroed out Huawei.

I think we left a small amount in there, but as Tunç said, it's probably down $10 million quarter over quarter, which if you think about $50 million on a run rate, that's most of it. There could be upsize. We're obviously continuing to meet with Huawei and understand what their demand is, but I think just from being prudent, from a forecast point of view, we know we just took that number down. I'm not going to try to predict what happens with that situation on a, kind of, on a geopolitical basis.

That's well, well beyond my capabilities. But for now, we kind of guided -- as we always do to what we kind of think we can say confidently and investors can count on. And so that's kind of what we've done. I think for the broader comm and data center, outside of Huawei, obviously, Tunç talked about data center.

We've definitely seen orders coming back there. And so that business is 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's kind of that broad base weakness similar to what we've seen in industrial. It's stable, but we haven't seen, kind of, signs of that recovery yet.

Thank you CJ.

Operator

Our next question comes from the line of Chris Caso from Raymond James. Your question please.

Chris Caso -- Raymond James -- Analyst

Yeah, thank you. And I'll certainly echo my congratulations to Bruce, it's been a pleasure. The question is on the comments on the Samsung business. And you had some earlier comments as that drops to 5% of revenue in fiscal '20.

I guess the question is, once it gets down to that 5% level, what's left? And from there, based on the R&D and design work you had, are you -- do you expect to grow that business? Is that kind of just a steady-state business to that point? Or at that revenue level, do some of the variables and non-handset parts of the business allow it to grow going forward?

Tunc Doluca -- Chief Executive Officer

Yeah. 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 of their products. And they buy more than just smartphone products from us, by the way, not single product company. So from our viewpoint though, when we see opportunities, we want to be careful that we're doing something special in terms of performance for them.

And from our viewpoint, if we find those types of opportunities and the return on investment makes 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 don't value that customer. We do.

There've been a good partner to us for many years and we'll 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 it might or it might not. And in terms of basically the product that we have forecasted for next year, it's product that they've used for many years, and it's one they value when they see the performance advantages from Maxim.

So we believe they're going to continue to use it.

Chris Caso -- Raymond James -- Analyst

Thank you, guys.

Operator

Our next question comes from the line of William Stein from SunTrust. Your question please.

William Stein -- SunTrust Robinson Humphrey -- Analyst

Great. Thanks for taking my question. And Bruce, I'll echo my congratulations. Question on the M&A environment.

Maxim has not participated recently, although in the past it had, and there's been some incremental level deal flow in the last few months. And I'm wondering to what degree Maxim would consider participating?

Tunc Doluca -- Chief Executive Officer

Yeah. I mean our M&A stand really has not changed. We're -- we continue to look for any companies or product lines for that matter at other companies where they will be accretive to us. They'll -- after we go through and work through the integration, they will be not dilutive to our great margin structure.

And in the end, we don't want to 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, we're -- we still look. We have a corporate business development group, and we look at what the assets are that we can purchase and see if we can add revenue and free cash flow that way as well.

William Stein -- SunTrust Robinson Humphrey -- Analyst

Great. Thank you.

Operator

Our next question comes from the line of Cody Acree from Loop Capital. Your question please.

Cody Acree -- Loop Capital Markets LLC -- Analyst

Yeah. Thanks for taking my question. And Bruce, 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 the opex for next year?

Bruce Kiddoo -- Chief Financial Officer

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, kind of, a slowdown, it usually come in underneath our forecast a little bit.

It's a very experienced management team. We've all been in the industry. We all understand cycles. And so usually before my team can go out and revise targets, the management teams already are kind of lowering spending and controlling areas.

That said, I think it's important to highlight that we are absolutely continuing to invest in our growth areas, right? We continue to invest in whether that in the industrial and factory automation or whether it's automotive, whether it's in the data center. Even in -- to the extent, sort of a broad-based consumer business. And so, we understand those. We're good at making choices and kind of doing our ZBB and drawing the line of where we invest, but you've 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 tight on those.

As far as the model goes, our standard model's always been to grow at about half the rate of revenue. And I think that's how we'll continue to look at opex going forward. But as we've said like in the overall environment, it is difficult to predict what's going to happen on the revenue side, but those things we control whether it's opex, whether it's spending within our fabs, whether it's inventory on our own books, inventory in the channel, all those things within our control, we're going to tightly manage. That's that.

We continue to generate 34% free cash flow margin in a downturn and we'll, obviously, generate much more than that on a -- in the upturn.

Cody Acree -- Loop Capital Markets LLC -- Analyst

Thank you much.

Bruce Kiddoo -- Chief Financial Officer

Thank you, Cody.

Operator

Our next question comes from the line of Christopher Rolland from Susquehanna. Your question please.

David Haberle -- Susquehanna International Group -- Analyst

It's David Haberle on behalf of Chris. You mentioned a pipeline of new automotive design wins of 1.1 billion in 2019 and that it's up strongly year over year. Can you give us a sense of your expectations for how this pipeline ultimately converts into revenue? And then also, which products make up the bulk of the 1.1 billion? Whether it's growth opportunities such as BMS and ADAS or more legacy type of auto products?

Tunc Doluca -- Chief Executive Officer

Yeah. So OK, so first of all, the pipeline, obviously, is the lifetime revenue you get from those design wins. Maybe I wasn't that clear about that. So how it distributes kind of depends on the particular design win, some products have design wins with longer lives than others.

Much of this win is in the areas that I mentioned before. I think if you look at them, their serial link was area wins, automotive power products whether whichever end function they go into or a big portion of it, and BMS also was large. So it's all in the expected areas of the design wins. And I think that, we're -- and 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 kicks back in line with what the long term growth rate has been, which is in the 2 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 assignments came exactly is the areas that we were investing in, which should be no surprise. And they were kind of all over the world, so there's no single region where they were concentrated in either. So that's why we are feeling very good about future growth in automotive.

David Haberle -- Susquehanna International Group -- Analyst

Thank you.

Bruce Kiddoo -- Chief Financial Officer

Thank you, David.

Operator

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.

Kathy Ta -- Vice President of Investor Relations

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

Operator

[Operator signoff]

Duration: 63 minutes

Call participants:

Kathy Ta -- Vice President of Investor Relations

Tunc Doluca -- Chief Executive Officer

Bruce Kiddoo -- Chief Financial Officer

Ross Seymore -- Deutsche Bank -- Analyst

Tun Doluca -- Chief Executive Officer

Harlan Sur -- J.P. Morgan -- Analyst

Ambrish Srivastava -- BMO Capital Markets -- Analyst

Jamie Zakalik -- Bank of America Merrill Lynch -- Analyst

Craig Hettenbach -- Morgan Stanley -- Analyst

Tom O'Malley -- Barclays -- Analyst

John Pitzer -- Credit Suisse -- Analyst

Josh Buchalter -- Cowen and Company -- Analyst

Tore Svanberg -- Stifel Financial Corp. -- Analyst

Charles Long -- Goldman Sachs -- Analyst

Mitch Steves -- RBC Capital Markets -- Analyst

CJ Muse -- Evercore ISI -- Analyst

Chris Caso -- Raymond James -- Analyst

William Stein -- SunTrust Robinson Humphrey -- Analyst

Cody Acree -- Loop Capital Markets LLC -- Analyst

David Haberle -- Susquehanna International Group -- Analyst

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