It's not that this model isn't working, it's just that its progress is masked by the combination of an unusual product mix attributable to the aggregate demand environment and the burden of inefficiently absorbed fixed costs.

"As we move forward, there are three primary things that I believe will materially boost not only ADI's gross profit margins, but its operating profit margin and bottom line earnings as well:

1. Improved economy of scale - as revenues go up, fixed costs are more efficiently absorbed
2. Lower capital spending will lead to lower depreciation charges
3. Improved mix of products that more strongly favors higher relative margin product categories

"One of my keen focuses is to quantify how well a business model leverages investment in R&D and SG&A. Think about it this way: these are the two factors representing the company's investment in profit and growth.

"Therefore, we need to measure how well the company invests here and executes. As a matter of fact, this might be the single most important thing a company does.

"An easy way to measure this is to simply divide non-GAAP gross profit dollars by non-GAAP R&D plus non-GAAP SG&A.

"Doing this tells you how many gross profit dollars a company generates for every dollar invested in operating costs. This represents how well a company does everything from picking the right product or service to sell to how well they design, build, market, sell and administrate.

"This is what I call an 'Operational Elegance' (OE) ratio and it represents how well a company does everything from picking the right product or service to sell to how well they design, build, market, sell and administrate.

"In the conference call, CEO Jerald Fishman tried to communicate that ADI is clearly focused on leveraging the return on its operational expense investments - he gets it.

"I talk with many senior executives and you would be absolutely amazed how few really embrace this operational concept; many actually think you can't focus both on leverage and growth optimization - bunk; you can if you really know how to run a company.

"Analog Devices last reported an OE ratio above 2.0 to 1 during the 2000 bubble. My bet is that ADI will return to that ratio, but this time leveraging a model that I think will sustain it for the long-term rather than just as a 'hurrah' when riding a bubble.

"My second bet is that ADI will hit that ratio inside two years and by the time it does, the stock will be trading for over $40.

"The short story here is I think ADI will grow revenue faster than its peers, mostly by successfully expanding its served market, and grow profits notably faster than revenue during the coming 12 to 24 months