Q2 2020 Earnings Call

In an answer session to ask a question during the session you'll need to press star one on your telephone as a reminder, studies program is being recorded I would now like to introduce your host for todays program Kathy.

Vice President Investor Relations. Please go ahead Kathy.

Thank you Jonathan.

Welcome everyone to Maxim Integrated's fiscal second quarter 2020 earnings Conference call joining me on the call today, our Chief Executive Officer, <unk>, and Chief Financial Officer, Brian White.

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

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

During today's call, we will be making some forward looking statements in light up 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 FCC filings.

Investors are cautioned that all forward looking statements in this call involve risks and uncertainties 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 bird attention.

Thank you Kathy good afternoon to all our participants.

We appreciate you joining us today and your interest in Maxim integrated.

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

Our December quarter results met our expectations, while also maintaining lean inventory levels.

Looking forward to the March quarter, we expected return to revenue growth for the company from the same quarter last year, driven by growth in communications and data center industrial and automotive markets.

We continue to be cautious given the persistent macro in trade uncertainty, but demand is improving.

Let me provide some color by end market starting with automotive.

In the December quarter, or automotive business was up 5% sequentially with double digit growth in or secular growth areas of BMS and driver assistance systems.

Our revenue growth in our overall automotive business fared better than the growth of global car production.

We see ample content growth opportunities for maximum in Adas applications in power management and point to point serial link data communication products.

At the consumer Electronics show, we held a large number of customer discussions on our BMS driver assistance in power management solutions.

[noise], our latest generation automotive serial link products.

Sports video audio and data at 12 Gigabits per second.

In recent quarters, we grew our serial link business from Chinese OEM customers.

Let's see yes, we showcased our wireless BMS technology, and new families of high voltage automotive power solutions that efficiently control and supervise the hundreds of watts of power record for advanced driver assistance systems.

In the March quarter automotive is expected to be strongly up sequentially.

We also anticipate automotive revenue to be up from the same quarter last year driven by driver assistance.

Infotainment content.

Let me next turn to the industrial Mark.

In the December quarter, industrial was up 7% from the prior quarter.

We experienced sequential growth in factory automation and automated test equipment markets.

Days of inventory in the channel remained relatively similar to the prior quarter.

In the March quarter, we expect industrial to be up sequentially.

Industrial is also expected to be up from the same quarter last year, driven by automated test equipment financial terminals and core industrial including factory automation.

Let me next discuss communications and data center.

In the December quarter, Comms, and data center was up 25% sequentially.

We experienced this strong ramp in demand for 25, GE optical products for base stations and 100, you optical products for datacenter applications.

We're excited about the rapid deployment of our analog laser driver products.

Hyperscale data centers in Fourg base station uplinks need to move more data well stay within their already constrain power budgets.

Makes sense transmitter products address both challenges within the power and cost constraints of our customers.

In the March quarter, we anticipate comms and datacenter revenue to be strongly up from the prior quarter.

The past or optical business has shown large demand fluctuations based on customer capex deployments.

We are currently enjoying a period of strong demand.

Comps and data center is expected to be strongly up from the same quarter last year in 100, GE optical for data center and 20, Fiveg up for Fourg and Fiveg base station applications.

Finally, let me turn to consumer.

Ended December quarter consumer was down 15% sequentially.

We expected weakness in smartphones and seasonal declines in other customer electronics.

The peak holiday shipments for consumer electronics had occurred in the September quarter March quarter, we accept consumer to be flat sequentially.

Gaming growth new flagship phones ramp and other customers are expected to be seasonally down.

Consumer is expected to be down strongly from the same quarter last year.

To summarize we have built maxim to be resilient and to position the company to outperform as conditions get better market demand is improving and we expect revenue growth in the March quarter compared to the same quarter last year and communications and data center industrial and.

Automotive.

We are executing on our strategy to grow revenue with new design wins in long live products in automotive and industrial.

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

Now I'll turn the call over to Brian .

Thanks to inch and thank you to everyone on the call today.

Revenue for fiscal Q2 was $551 million.

Up 3% sequentially, and 6 million higher than the midpoint of our forecast range entering the quarter.

Compared to the same quarter year ago revenue was down 4%.

Our revenue mix by major markets in Q2 was approximately 30% industrial 26% automotive, 24% constant datacenter and 20% consumer.

Now, let me turn to our distribution channel.

Distribution comprised 51% of Maxim to revenue in Q2.

We ended the quarter with just 49 days a channel inventory.

Up one day from the prior quarter and well below our long term target of 60 days.

Our lean channel inventory was enabled by our tight inventory management combined with stronger than expected resells for optical and BMS products.

Turning to the TNL maxims gross margin, excluding special items was 66%.

A 100 basis points from the prior quarter and above the midpoint of our guidance.

With the increase driven by favorable manufacturing efficiencies.

Operating expenses, excluding special items were $188 million.

Approximately 3 million from the prior quarter.

Good luck in the full quarter impact of annual merit increases for employees.

And an increase in variable compensation due to higher profitability.

Q2, GAAP operating income excluding special items was $176 million.

Operating margin was 31.9% of revenue.

Up a 160 basis points from the prior quarter due to higher revenue and improved gross margin.

The Q2 GAAP tax rate, excluding special items was 13% and equal to our current outlook for the remainder of this fiscal year.

GAAP earnings per share excluding special items was 56 cents three cents above the midpoint of our guidance range.

Turning to the balance sheet and cash flow.

Total cash cash equivalents and short term investments were $1.8 billion.

Down $10 million from the prior quarter.

Q2 inventory days ended up 109 down six days from Q1.

And inventory dollars were down 5% from the prior quarter.

Capital expenditures were 14 million.

Trailing 12 month free cash flow defined as cash from operations less capital expenditures.

$737 million or 34% of revenue.

Free cash flow per share was $2 as 70 cents.

And our free cash flow yield is 4.5% at yesterdays closing stock price.

For capital return share repurchases totaled $108 million in Q2.

As we bought back approximately 1.9 million shares.

Dividends totaled $130 million in the quarter.

Based on Yesterdays closing stock price and our quarterly dividend of 48 cents per share our dividend yield is 3.2%.

Total return of cash through dividends and share repurchases.

The 126% a free cash flow on a trailing 12 month basis.

Now I'll turn to our outlook for the March quarter.

Our beginning fiscal Q3 backlog was $456 million.

Based on this beginning backlog and expect it turns we forecast Q3 revenue to be between 555 and $595 million.

Up 4% from the prior quarter and at 6% year over year at the midpoint.

Q3 gross margin, excluding special items is forecasted at 65.5% to 67.5%.

50 basis points from the prior quarter at the midpoint on higher revenue.

Q3 operating expenses, excluding special items are expected to be up approximately $2 million from Q2.

Driven by higher variable compensation on increased profitability.

Fiscal Q3 capital expenditures are expected to be approximately 3% of revenue.

And our tax rate, excluding special items is expected to remain at 13%.

For Q3 GAAP earnings per share excluding special items, we expect a range a 57 to 65 cents.

In summary, we're pleased to see improving business trends with an outlook for continued sequential revenue growth in the March quarter, along with the return to year over year revenue growth.

That growth combined with our strong financial model enables us to generate increasing profits cash flows and shareholder return.

With that ill turn the call back over to Kathy.

Thanks, Brian that concludes our prepared remarks, and we will now open the call for questions I'd like to continue the same Q and a process that we've used in previous calls we'll take one question from each caller. So that we can get to as many people as possible.

Jonathan could be please help our first question.

Your first question comes from the line of Ross Seymore from Deutsche Bank. Your question. Please.

Thanks for let me ask a question and congrats on the strong quarter in guide to just wanted to go back to last quarter and compared to this quarter a quarter ago. I think stabilization was the operative phrase to use to describe the business just like things have gotten better across the board given your guidance can you just give us an update on on either geographically or by end.

The market do you think it's true end demand getting better or is it that 49 days of inventory in the channel, which is still very low just starting to refill as you look into the March quarter.

Yes, so so I'll summarize what I, what I said in.

The prepared remarks, but essentially so considering our Q3 guide what we're seeing is a few things happening there number one we have some good growth.

Really in orphan.

Then driven growth nor automotive products and in our optical products were both data center in Fiveg. So that's strong demand, we're seeing from our customers with nice growth.

On other hand on the industrial side, we've not really seen of full recovery I'd say too too.

Two years ago levels, but both Q2 and Q3 had some growth compared to the same period last year. So what we're seeing there is.

Reasonable demand coming from customers.

And all of this we've been able to also maintain lean inventory levels in the distribution channel. So.

I think one of the question that we got last quarter was was it was the growth really coming from.

Refilling the inventory in distribution and that's not what we did so essentially it's very strong growth in some areas that I mentioned in automotive in comms datacenter, but we're still seeing a broadening.

Increase in demand.

Great. Thank you.

Geographically I guess aggressively maybe.

Brian can answer that piece sure geographically, particularly as we look at resell through distribution.

The Asia region continues to be the strong, yes, with particular strength in China and.

In terms of softer areas Europe continues to be a little bit week.

Thanks.

Thank you Ross.

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

Good afternoon solid execution on the quarter guys and good to see the return of Yearoveryear growth this quarter.

The little bit hard to calculate exactly because of the revenue segmentation change in fiscal 19, but it looks like.

Auto business had another year of outperformance I think it was flat to maybe slightly up in calendar year 19 versus auto production that was down about 5% to 7%. This year. The outlook is for flattish auto production growth and within that I think China easy production is targeted to grow about 8%. So.

Given your exposure to some of the faster growing segments like TV in.

Das with some of your serial link and BMS products.

Do you think that this segment can approach kind of low teens percentage year over year growth as the year unfolds.

Okay. So let me take that one so essentially with what you summarize there will with our exposure to Tvs, which is a faster growing segment.

The made it grew about 20% per year in our good market position with BMS products.

And also in Ada Es.

We have a lot of design wins, we've had in the past few years and those are ramping into production. So those two segments.

We believe we're going to grow it.

Much better rates than our average.

Infotainment is more tied to.

Growth in the car units, but thats doing pretty well to recently.

So you know, it's really hard to exactly predict.

But I think we continue to believe that we can grow faster than car production units globally, a because content growth is faster than car production units and be because we've invested and have great products and technology for two of those segments that are in kind of I was call. It in.

Hyper growth.

Globally so.

Yes, we will grow.

Are you stated a number you know I'm a little reluctant to give a number but we believe for this year with long term, we do expect an automotive to grow in the low teens into low teens.

Thanks to lunch.

Okay. Thank you Ron.

You are next question comes from the lined up Ambrish Srivastava from BMO. Your question. Please.

Hi, guys. Thanks for the question this is James and calling in from British.

I was hoping just to continue touching on auto so well I. Appreciate the fact that you outgrew auto SAR.

I believe you said the auto was grew 5% sequentially I believe last quarter, you had guided to be up strongly. So first was just below your previous expectations and second can you talk about the broader auto demand environment and what gives you confidence in the guide for that market to be up strongly in the March quarter. Thank you.

Yeah, So I'm going to do a little bit from memory and I think they can help me here.

We did have we did guide to strong growth.

I think we were maybe a little bit under that would not.

You know a large number so I think there were came pretty close maybe slightly lower in the previous quarter.

This quarter, we know we are seeing very strong demand, especially for our products that go into Adas systems. So that's the strong growth driver for us.

And we've got some good design wins in China, Oems, which I mentioned in the call. So there theres some.

Specific areas and automotive that are doing really well for us and as we had spoken last time.

Some of the the.

The slowing growth we saw in automotive weve attributed to maybe inventory digestion.

As a car production slowed last year. So the fact that were also believing that we're seeing that infotainment will be another growth. So it seems like that is maybe confirming that maybe some of that inventory is now being digested by car manufacturers. So.

We're we're we're feeling pretty good about the the demand we're seeing in automotive for this quarter.

Thank you.

You're welcome Thank you Jim.

Thank you. Our next question comes on line of Vic already up from Bank of America. Your question. Please.

Hi, This is Blake seeing an ultra that Korea I was just curious how we should think about the virus impact in China's growth Q1.

There is any impact which end markets, specifically, you see that having more of an impact versus others. Thank you.

Yeah. So obviously this development.

Both of restrictions and travel and so on.

Occurred pretty recently, so to get a full assessment on which market it will affect.

Having a comprehensive view on that is pretty short frankly.

The figure that out.

There is in the areas that are affected.

There are some of our optical module makers are in that region and the have communicated that they will shut down a bit longer than the normal lunar year shutdown. So there'll be some effects on that.

We don't believe it's going to be the large effect on us, but that's that's the only customer information that we have some specifics on so for.

We don't believe that's going to have an impact on our total revenue for the quarter.

Got it thank you.

Thank you bye.

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

Yes, good afternoon, guys and congratulations on solid results since I'm, just kind of curious about the backlog coverage.

You are bringing into the March quarter, it's about at the midpoint of your revenue guide about 79%, which is as high as I think I've seen it. So help me understand rather than trying to take a conservative stance because there is still some macro uncertainty out there is there anything specifically that's driving the backlog coverage to be this high.

Hi versus whats, usually kind of in the low seventies as business mix and end markets that are more backlog oriented than turns or just help me understand why turns couldn't be better in the quarter.

Hey, John This is Brian Thats, a great observation.

And as Twod to it you mentioned, we've had very strong demand for optical products and so what you're seeing is the effect of the higher than usual amount of optical orders in our backlog that we don't expect to ship all of which this quarter.

Perfect. Thank you.

Thank you John .

Thank you. Our next question comes the line of credit gotten back from Morgan Stanley . Your question. Please.

Yes. Thank you I touched just a follow up on your comments about wireless BMS at CES can you just talk about kind of the developments there and just you know gauge the timeline in terms of product introductions, and then Calvin what period of time could you see those products eventually come to the market.

Yes, so sort of wireless BMS is a euros.

Technology that we have been working on.

Essentially what we developed.

In a nutshell was a way to be able to connect all of our.

Individual essentially metrology chips that are on.

The packs to talk to a central control unit through wireless technology.

We demonstrated that it can be done.

Obviously, we need to do more work to make sure that it is as robust as wired technologies, So and as you predicted that's going to take a little bit more time, it's hard for us really tell exactly one.

We will gain and though.

Customer acceptance in terms of.

How robust is as a complete system.

But revenues from this will not is not on on the horizon for multiple years. So it's really just the technology that.

We're showing but we have to product does it.

In a way that's equivalent to our age so the solutions that we have in our in our wired products right now.

So revenue wise.

Multiple years in the future.

Understood. Thanks.

Thank you Craig.

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

Hi, guys as my press gone procedure I, just wanted to dig a little more into the comms and data center side of the business.

Stronger than expected this quarter, great Cod next quarter. So can you kind of dig into a little bit more what's driving that uptick across 25 gig 100 gig and how sustainable are those trends as we try to think through all of calendar Tony. Thanks.

Yes, so there are there.

Really two components.

To this strong growth in comms and data center one of them is in data center, where we're selling products that are hundred GE or four by 20 Fiveg lanes.

We have a strong presence and good design wins on the laser driver portion for which we basically have an analog solution.

And.

And that if you recall.

We had strong growth in that about a couple of years ago, and then there was a lot of inventory built.

Customers and the module makers took us a while to drain that down and now back for the last two quarters. So that's the story there I think we'll get into a healthy level of consumption on those products.

The.

The cloud customers essentially are deploying.

More data transport capability in the data centers. So that's what's driving that so it's really a recovery from an inventory correction last year.

On the 20 Fiveg front, it's a one lane by 25 transceiver IC.

Yes.

Transimpedance amplifier products and the like a system management chip for a module. So it's kind of a set of products that we sell into that.

And that solution is very popular for.

Fiveg and I guess for GE installations that are trying to be made fiveg ready for base stations.

And that we're seeing a strong growth.

Especially now coming from China.

Because we ever again a.

Popular solution that that everybody like these.

Designs were one.

We bought a couple of years ago. So that's what's ramping.

As long as the Fourg to Fiveg.

Rollout continues I think we're going to continue to so these products because of our strong market position.

But as I said in my prepared remarks, both of these businesses and especially the the.

The 20 Fiveg.

Connections. This business is kind of lumpy and right now we're enjoying a good spot but those of you that are follow these Marcus always remember in the past that there are times when theres some inventory digestion that happens in so but I think right now.

Fundamentally long term, even if we get these lumpiness I think these are good.

Growth markets because of the amount of data that's being moved both in data centers and in wireless.

Thank you.

Okay. Thank you Matt.

Thank you. Our next question comes in line with Stephens from RBC capital markets. Your question. Please.

I actually wanted to focus a bit on the consumer side it looks like that seeing a lot more pressure that we thought.

At least near term can you walk through what are you guys expect me to full year out of that out of that business in terms of like the calendar year I'd, just like temporary specific anything specific industry wide.

Issued I will say, particularly since Apple reported numbers are pretty solid time in the quarter.

Yes so.

Just to remind everybody I mean are.

Consumer business, if you walk back a few years ago was pretty concentrated on one.

Our largest customer.

Our strategy has been for multiple years to diversify the business to go into multiple other customers as well as other markets even at the same customers. So we've been execute on that one executing on that one.

If you look good.

Our guidance into the current quarter basically we have are large customers.

Ramping a new flagship phone, we've got good demand for our gaming products.

Many of the other products really go into a seasonally weak period.

After the holiday season, so we're seeing that our seasonality is definitely is changing.

He's already changed to be more heavier in Q1.

Then and it used to being basically in our in our Q2. So in our Q3, sorry, so it's going to behavior in.

Q1 of the next fiscal year.

Now your question about as are we seeing something this particular to maximize our content has gone down at our largest customer. So you are seeing the effects of that.

But we are seeing good demand from other customers, but it takes a while for this all to balance out.

Thank you so thank you.

Okay. Thank you Mitch.

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

Hey, guys. This is Tom O'malley on for Blayne Curtis Congratulations on the nice results.

Looking at Marsh here, you guys have obviously come from levels with some some weaker trends and you're seeing above average growth in terms of seasonality can you remind us what normal seasonality for June is I know you just finished talking about how consumers a little bit different than historically, but what's the right way to think about the entire business into the fourth fiscal quarter.

Do you think just coming from a lower base that you can outgrow that.

Yeah, I assume you asked about the March quarter, not seasonality group.

Mark seasonality and for the rest of the fiscal year, if that's okay.

Okay.

So I don't have the seasonality numbers in front of me, but.

Free cash is going to healthy earlier okay.

Hey, Tom this is Kathy so.

Of course, we're only guiding one quarter at a time, but we do you usually see that the first half of any given calendar year is better for industrial and automotive.

And historically has changed outlined in his last question and answer.

We have historically benefited from a ramp in smartphone revenue in June quarter, but thats changed now because of the lower content that we havent that customer. So Samsung is much smaller part of our revenue and so we we should not expect that to recur this year energen quarter.

And then finally for comms and datacenter given the Lumpiness of optical it's hard to predict and then there's not really got seasonality that we can point to there.

Thank you.

Yes sure.

Thank you once again, ladies and gentlemen, as reminder, if you have a question at this time. Please press Star then one.

Our next question comes on line of Jim Mccaughan from Stifel. Nicolas Your question. Please.

Yes.

Yes, my congratulations on a solid quarter.

Yeah. The question on the.

Automotive side you mentioned.

Battery management eight as those are growing very nicely as it.

There you are key drivers in that segment can you give us a sense of how big that is relative to your maybe the legacy or are the larger auto business.

Yeah. So.

Let's see if we took.

Three as an example.

Roughly half the business.

Half of automotive infotainment.

And if you look at.

Maybe I missed the need us.

Probably in the range of the mid teens of automotive each.

So that's kind of gives you an idea I mean, these numbers very because the mix changes quarter over quarter, So happy with containment.

Mid teens for BMS, and probably around mid teens freed us rough.

We did that answer your question.

I guess, that's very helpful.

Do you, where do you see that going into next three to five years and proportion.

Yeah, it's hard for us to predict that but a higher with would be.

The obvious answer.

I mean, there clearly growing if you look at some of the numbers, we quoted double digits and so on and and clearly it will grow pretty quickly just to give you. An example.

You know similar calls a year or two ago, we would use to say infotainment was 60% to 70% of the business. So the rest of its grown pretty nicely.

Great. Thank you.

Thank you Jeremy.

Thank you. Our next question comes from the line, though toy Sandberg from Stifel. Your question. Please.

Yes, hi, and congratulations on the quarter I'm not sure. This question's been asked if you addressed this but.

Intel on their call talked a lot about.

Very strong data center dynamics of the first half within it kind of expecting a slow than second half I know, it's very early on and I don't even know you have visibility but.

Do you have any thoughts on that particular topic.

It's I mean.

Honestly tore I mean, if were I don't think we're going to add anything to until those they know the customers better than we do.

Remember that were.

One one or two.

You know.

Farther away from them, because we're selling too.

Mostly our datacenter customers are module makers that are selling to cloud customers and.

And I think.

I don't think we can see anything that either confirms or denies with Intel will say.

My recommendation would be to go with.

Whatever they're projecting.

Now that already I couldn't get sort I couldn't help me on that.

That said Thats. Thank you.

My follow up is on the channel inventory. So it's obviously you know below your target.

And I'm just wondering what the dynamics are there is it mainly because of shortages or is just customers kind of being gun shy about visibility.

Just just trying to understand why is running still quite a bit below your long term target.

I want to make sure instead of course for your question was about.

China inventory not channel inventory channel channel that China, Oh channel.

Channel, England.

So well I mean, essentially its channel inventory as you know it's running below our model.

And where we are desire is to bring it back up to what our model levels are.

And we actually said that in the last call, but we saw as you stated we saw stronger demand for the optical products, especially in that causes not to be able to completely.

Cash up to what we wanted.

Our our read is that the end demand for these parts are pretty strong so they're basically being consumed.

You know pretty soon after we ship them.

Not too much inventory because of strong demand more than anything.

Okay, that's been caramel that sorry, sorry, I, just add to that trade Katherine so.

We also highlighted last quarter that we're starting to ship serial link products to Chinese Oems.

In automotive and that goes through Dusty we saw strong resellers of those products as well. So there are some maxim specific products that are doing quite well and resale.

To China Dusty.

That's very helpful. Thank you very much.

Yes, Thanks Terry.

Thank you.

Does conclude the question answer session I'd like to hand, the program back to Kathy for any further remarks.

Okay. Thank you Jonathan that concludes today's conference call. Thanks for your participation and for your interest in Maxim.

Thank you, ladies and gentlemen, if your participation in todays conference. This does conclude the program.

Everyone have a great day.