Looking on the bright side - The Back Page - Jerald Fishman, president and CEO of Analog Devices - Interview

Electronic News, Oct 21, 2002 by Ed Sperling

Jerald Fishman, president and CEO of Analog Devices Inc., sat down with Electronic News to discuss the inner workings of his company, the economy and where the next opportunities will be. What follows are excerpts of that interview.

Electronic News: What's different about this downturn for the electronics industry?

Fishman: Nothing. We're in one of our cycles. Given our history, this has gone on for 30 or 40 years.

Electronic News: But some people are saying this downturn is off the charts.

Fishman: We've posted a 17 percent [compound annual growth rate] for 40 years. I'm optimistic. We've had good and bad years. But when you look at it, we've really only had five or six bad years. And until this year, we've never had two down years in a row. What has changed is IT. In the last five years, IT has had a lower growth rate. There's never been a period like that.

Electronic News: Given this sustained drop, how much are you spending on R&D?

Fishman: We're investing 25 percent right now.

Electronic News: Is that because your total financials are lower, or because you want to keep it at that rate?

Fishman: Our model is about 15 percent. Our sense is that what's happening at Analog is average. What we don't know is whether it's accelerating. If you believe you can grow 20 [percent] to 25 percent a year, you don't spend 25 percent on R&D. Our problem now is that since the mid-'80s, half of all semiconductors have ended up in computers. If you take a look at [Texas Instruments] and Intel, neither has any real growth over the past five years.

Electronic News: But isn't there growth in electronic equipment of all sorts?

Fishman: Electronic equipment sales have continued to grow. The trend is that the dollar amount of electronic equipment is going up every year. The content of semiconductors in that equipment used to be 9 [percent] to 10 percent. Now it's 14 percent. And it's not unreasonable to assume it will hit 18 [percent] or 19 percent. The percentage of semiconductors involved in signal processing in 2002 is about 15 percent. By 2007, it's estimated to grow to 25 percent. Assuming that semiconductors will grow 10 percent a year, signal processing will grow at least twice that.

Electronic News: From your vantage point, what's the next big thing?

Fishman: The next big thing is commercializing what was.

Electronic News: That means the Internet and electronic business?

Fishman: Yes. And signal processing.

Electronic News: It doesn't sound like this is going to be a smooth transition, though. What will happen in the semiconductor business?

Fishman: While the industry goes through this gut-wrenching shift, and as signal processing grows, in aggregate it does not look like there will be great growth for semiconductors. TI is the same size they were in 1999. Linear and Maxim are a little bigger. We're a lot bigger.

Electronic News: But it looks like TI also is shifting into the analog space.

Fishman: TI has read our annual report.

Electronic News: How much of a lead do you think you have?

Fishman: We're about eight steps ahead. Most of their analog sales are low-performance analog. Our business is built on the experience of a lot of people. Buying a business (Burr-Brown) you don't get that. It will take them a long time and a lot of focus. You have to think about this differently than a high-volume business.

Electronic News: But Analog Devices also is pushing into TI's stronghold, namely DSP. How is your approach any different?

Fishman: There are two different types of DSP. One is a horizontal market, which is where we're heading. TI built the bulk of its business in vertical markets--handsets. That accounts for about 80 percent of TI's DSP sales.

Electronic News: How do you differentiate horizontal and vertical markets?

Fishman: A horizontal market may have 10,000 customers; a vertical market may have 20 customers.

Electronic News: So your position is that if a big cell phone company like Nokia is having trouble, TI will feel it?

Fishman: We see the best opportunities in horizontal markets. We find them to be very performance-oriented. If you have the highest-performing DSP, you win.

Electronic News: How does that compare with your analog business?

Fishman: Our goal is to have the same number of DSP customers as analog customers, which is tens of thousands. TI is playing to a much smaller number.

Electronic News: What does that mean to your bottom-line?

Fishman: If your R&D content is going up, you need a profit structure to support that. That means you've got to have proprietary products. If not, you can't get the margins you need. At Analog Devices, 80 percent of our products are proprietary.

Electronic News: What are your margins?

Fishman: Our gross margins are in the mid-50s. At the peak of the cycle, they were in the high-50s. They're a bit lower now, but they have never run below the low-50s. Even at half the volume, we have the same margins. If you start a business at 30 percent gross margins, when the down cycle hits, you're dead.

Electronic News: Does that mean you won't be building any fabs for DSP?