Q2 2020 Earnings Call
[music].
Good morning, and welcome to the handle device since fourth quarter and fiscal year 2019 earnings conference call, which has been the audio webcast speaking telephony handle for whatever.
I feel like to introduce your host for today's call Mr., Michael you could probably director of Investor Relations, Sir the floor is yours.
Thank you Sheryl and good morning, everybody. Thanks for joining our second quarter fiscal 2020 conference call.
With me on the call today, or FDIC O Vincent Roche in FDIC AFFO shop had Georgia.
Anyone who missed the release you can find it leaves financial schedules at Investor dialogue Dot com.
Now onto the disclosures information we're about to discuss include forward looking statements involve risks and uncertainties.
Actual results may differ materially from these forward looking statements and it's all to various factors, including the uncertainty regarding the duration of cold in 19 pandemic, that's impacting our business for customers and suppliers and the global economy and also those discuss in earnings release in her most recent tend to.
Forward looking statements reflect our opinion as the data this call.
It takes no obligation to update these forward looking statements in light of new information for future events.
Our comments today will also include non-GAAP financial measures, which excludes special items comparing our results to our historical performance special items are also square from prior periods.
Reconciliation of these non-GAAP measures to the most directly comparable GAAP measures and additional information about or non-GAAP measures are included in todays earnings release, and with that I'll turn over to 80, I C O digit Roche Vince.
Thank you, Mike and good morning to all from Boston I.
I hope that you and your suddenly use are all staying safe and healthy during this period.
First we want to express our gratitude to the healthcare workers and the money older heroes on the front lines, we're protecting the health and wellbeing of our community or communities. Thank you all so very very much.
When real about starting it's called the mid February we were just beginning to understand the depth of the cold with 19 impact in China and since then the pandemic has had a profound impact on the world.
Bring tremendous stress in society and of course, the global economy.
To counter balanced as we've seen an unprecedented response from governments with the deployment of fiscal and monetary policies to soften the downturn and restart economic activity whenever that maybe.
What are sectors not immune to the tournament operating environment. It's my belief that technology will be what modifies the current weakness and drives new demand and business models post pandemic.
That's not to say that we're standing still we've taken actions to curtail spending and reinforce our cash position.
And we were learning from this challenging period and adapting quickly while still investing to ensure that we're well positioned in the recovery and for the long term.
Our team has embraced the challenges with many of our employees working from home.
But obviously not everyone can walk remotely and I want to acknowledge and thank our manufacturing employees.
Continued to perform at exceptional levels and deliver for customers.
So these employees supporting or people operations, we've implemented safeguards to protect them, including more P. P E increasing social distancing undertone sanitization.
And we provided them with additional incentives and benefits too low for continuity during this very difficult time.
Our team is also doing an excellent job staying close to where customers.
We moved quickly to pivot manufacturing lines and prioritize our health care solutions that are needed in the fight against <unk> 19.
This has allowed us to expedite supply used in products, such as ventilators respirators imaging systems and patient monitors to our health care customers.
And I'm incredibly proud of the resourcefulness and commitment that we have shown in rising to this critical challenge.
Additionally, through the 80 I Foundation.
We've made multimillion dollar donations to support both global and local pandemic response efforts.
Our work goes beyond financial contributions.
We're also partnering with hospitals and biotech startups to develop solutions.
Such as rapid point of care diagnostic tests, and clinical grade patient monitoring that leverage our technologies.
So now I'd like to discuss the current operating environment a bit.
Given the region.
The current crisis mobile business activity has been disrupted and two days, we've seen a deterioration in demand within our automotive broad based industrial and consumer businesses.
However.
Our business is proving more resilient injuring the global financial crisis.
So that in health care demand is at record levels and communications demand is robust across wireless and wireline sectors.
We're also seeing strengths and portions over industrial instrumentation business unsteadiness in our defense business.
No. This success is no accident.
We are organic investments and acquisitions that fit tight LTC Eddie I. It was a very different company.
For a decade ago with more diversity, a broader portfolio across high performance analog power and RF.
Hi exposure to more profitable and durable and markets.
So let me move to the other side of the equation and talk a little bit about supply.
Across the world supply chains were disrupted, but many governments order chunking place mandates and close their borders.
Brady I capacity was reduced our Bakken test and assembly sites in mid March across the Philippines, Malaysia and Singapore.
Once granted essential status, we acted quickly getting responsibly to ensure employee safety and improve our capacity.
And today I'm glad to say, we're operating that normal capacity levels.
This demonstrates the agility of our global operations and the dedication of 80 eyes employees around the world.
Despite the fluid and uncertain demand and supply environment, we delivered revenue of 1.32 billion and yes adulterous it since.
This was in line with the original range, we provided on our first quarter earnings call.
Underscoring the resiliency and flexibility of our business model in any economic backdrop.
No. It was we've mobilized preserving the strength in the near term we're capitalizing on the many opportunities we see to fortified and expand our market position for the long term our team remains focused on or three strategic priorities.
Let me provide you with a brief looked at them.
First is the efficient use of capital.
Importantly, <unk> financial liquidity to meet the needs of our business across critical investments dividend payments and servicing or debt.
Despite the current Mclean environment, we've generated $1.8 billion, a free cash flow or 32% themselves over the trailing 12 months.
This continues to place.
And the top 10% of the S&P 500.
Remote or 55 year history, we've encountered another good at several black Swan event successfully by taking a disciplined and balanced approach to financial management.
Specifically.
The first cold in our capital is funding new product development. This means investing smartly in both our people and technologies.
Sure we continued to deliver disruptive innovation.
In the quarter, just passed we invested 90% of revenue and R&D spending 95% on the most attractive opportunities across our beat to be markets.
We also remain committed to strong shareholder returns.
Our dividend as the cornerstone.
In the quarter, we returned over $340 million to shareholders through dividends and share repurchases.
So let me turn for a second priority, which is about maximizing customer impact.
We are continuously innovating to stay ahead of customer needs well covert 19 has brought new challenges. It is also revealed new opportunities in a reordered world.
During the quarter, our customer engagement didn't slow down we hosted hundreds of virtual seminars with thousands of customers in attendance.
Training them on new solutions and new technologies.
These interactions we're very productive we saw increased design activity on new product development across markets and customers.
For example.
We partnered with a key electric vehicle customers to Reimagine, how audio is rendered across their fleet.
As a result of this increasing focus collaborations we did our high performance audio digital signal processing work it to be platform.
More than doubling our content per vehicle.
I didn't or instrumentation test business for data center compute we continue to work with customers on reducing their system complexity and getting to market faster.
Our innovative solutions combined or analog mixed signal and Howard Micromodule portfolios.
These solutions deliver four times the channel density while simultaneously increasing throughput.
Well. These are just two examples there are many more across all of our markets. It's this current flurry of design activity that positions in <unk> to accelerate post pandemic.
Our third priority is capitalizing on secular trends to expand our addressable markets and drive diversified growth.
Well every downturn has its own unique characteristics. They all seem to have one thing in common.
That is they drive tremendous change.
Industries are prioritizing digitalization and connectivity more than ever.
New industries are emerging focused on the physical and cyber.
Yeah, Hi, where the data is born is at the center of these exciting secular growth opportunities and I wanted to share some thoughts with you today.
As I noted earlier, our health care business is providing several of the technologies that are critical to the diagnosis and treatment of covert 90.
Taking a step back 80 I has been committed to this market for many years as we anticipated the opportunity for innovation.
Deliver better patient outcomes.
Oh This crisis will challenge is to rethink and hopefully fast right.
Yeah, accessibility affordability and wellness focused global health care.
But she this healthcare systems are going to need to be operated on clinical grade patient monitoring we'll need to be extended from the hospital right down to the patients home.
Massive adoption of sensing computing plugs capabilities is going to be required.
We believe that idiotic technologies will be at the forefront of this transformation.
The communications market is moving at a rapid pace to keep up with the strains put on bandwidth installations as more people working remotely transact business is more digitally.
So media from everywhere.
Your Eddie I think a critical role in building out the infrastructure required from always connected world.
Integrated transceiver.
Power and optical control portfolios.
Our enabling customers to economically scaled or investments to boot season next generation.
We continue to innovate <unk> future performance isn't heartening.
Positioning us to gain share.
To capture additional buttons.
Another secular trend we're benefiting from is the rise of industry 4.0, or why this trend is insulin.
The pandemic, it's moving it to the forefront of our customers mines.
It's clear that post condemning supply chains would be re imagined.
A new ones will be films ones that are more flexible automation and perhaps sovereign.
So the economic burden that comes with this.
Customers will further automate their businesses with intelligent conducted factory floors and the increased use of robots who bought.
Analytics.
This creates additional demand for precision signature in apart franchises.
Index, then <unk> areas like soft right, Oh sensing condition based monitoring and robust connectivity.
Outside of these secular growth trends I'm also personally in Florida.
The tremendous sustainability benefits that we've seen in a short amount of time.
For example.
We've seen sizable decreases in carbon dioxide nitrous oxide and carbon monoxide.
I believe that 80, I and industry at large.
And should be leveraging its prudent brain power to be better stewards of the planet.
We recently published our comprehensive corporate responsibility report entitled Engineering Good.
And I can assure you there'll be more to come as I'm deeply committed to it you guys leadership here.
So in closing the shape of economic recovery is still very very uncertain and dependent on many variables well, we're confident in our outlook provided today.
This unprecedented macro backdrop, we continue to influence supply and demand dynamics for some time to come.
Embracing these short term challenges and by leveraging the collective.
Our talent or technology and customer engagements I'm very confident we will emerge stronger.
So with that I'd love to turn it over 2%.
Thank you Vince let me add my welcome to our second quarter earnings call.
As a reminder, my comments today with the exception of revenue and non op expenses will be on an adjusted basis, which excludes special items outlined in today's press release.
Back in March we would to our guidance for the second quarter.
Spread of coded created an enormous amount of uncertainty and impacted our supply chain.
However, we acted quickly and decisively and I'm pleased to say that our second quarter results were within our original guidance with revenue of 1.32 billion operating margin of 38%.
And your P.S. of a dollar rate.
Without those capacity limitations, we believe revenue would have been above our original midpoint provided at our first quarter earnings or approximately $50 million higher.
So let's get into the market results.
Our beat to be markets, while very volatile intra quarter due to cope with 19 performed relatively in line with our expiration expectations.
To be revenue increased 3% sequentially.
And if not for supply constraints, we would have delivered on our outlook of growing mid to high single digit sequentially.
Notably we achieved these result, while reducing channel inventory by 60 million in the quarter.
Industrial which represented 54% of revenue during the quarter finished up 4% sequentially and declined 8% year over year.
While we experienced broad based weakness across most applications.
Our health care memory test and energy verticals, all grew from the year ago period.
Communications, which accounted for 21% of revenue finished up 15% sequentially.
And given the tough compare decreased 24% year over year with weakness across both wireless and wired.
Down in production.
As many customers were required to suspend their operations in response to cope with 19.
Lastly, consumer which represented 11% of revenue was down 14% sequentially and 5% you every year as lower consumer spending impacted both portables and prosumer.
Notably we continue to expect twentytwenty to be the bottom for our consumer segment.
Let's go to the P.L. for the second quarter.
Gross margin came in at 67.7%.
Down both sequentially and year over year related to low utilizations from reduced production levels and the factory closures I mentioned earlier.
As a reminder, we expect to realize 100 million of costs of goods savings exiting fiscal 2021 through the optimization of our manufacturing footprint.
<unk> with 390 million down 5% sequentially, marking the sixth consecutive quarter of declines.
This was driven by a combination of the quick aggressive measures. We took in response to the pandemic.
Well as our continued focus on cost management.
Operating margin finished at 38% up over 100 basis points sequentially and down your every year.
Non up expenses for 49 million up sequentially, but down over 10 million compared to last year.
Our tax rate for the quarter was approximately 11%.
And all told second quarter adjusted E.P.S. came in at a dollar rate.
So now let's go to the balance sheet of cash flow.
During the quarter proactively bolstered are strong liquidity position.
We retired at 300 million dollar bond and subsequently raised 400 million from the semiconductor industries first ever Green Pond.
And that's a cautionary measure we also temporarily suspended our share repurchase program midway through the quarter.
As a result, we finished a quarter with approximately 800 million of cash and about 5.6 in total debt.
Or net debt to eat but that ratio is 1.9 times on a trailing 12 month basis.
Between cash on our balance sheet and the commitment under a revolving credit facility 80, I has more than 2 billion of liquids liquidity.
Easily eclipsing our annual dividend payment and the <unk> do in January of 2021.
Inventory was essentially flat from the first quarter. However days of inventory fell to 126 from 133.
Oh, we're cell in revenue was well below our shell through revenue at distributors.
As I mentioned reduced channel inventory by about 60 million in the second quarter.
This brings our total channel reduction to around 100 million in the first half a fiscal twentytwenty.
Channel inventory currently sits comfortably at the low end of our 78 week range.
So finishing on cash flow for the quarter cash flow from ops was 429 million and cap X. with 60 million.
We expect cap extra declined meaningfully in the second half and finish the year below our normal target range, 4% of revenue.
In the corner 80, I paid approximately 230 million and dividends and repurchased one hurting 14 million of our stock.
On a trailing 12 month basis free cash flow finished at 1.8 million or 32% of revenue.
Over this period, we reduced debt by roughly 400 million and returned around 830 million to shareholders by a dividends and an additional 500 million via repurchases.
As a reminder, our capital return policy is to return all free cash flow after debt reduction to shareholders.
Fiscal 2020, we expect to reduce debt by 300, a 500 million and return 100% of the remaining free cash flow.
Before moving toward outlook I went to highlight what we are seeing in terms of demand and supply.
As Vince mentioned earlier, our business is performing quite well under the current macro backdrop.
Health care is very strong and we expect this strength to persist into the back half of the year.
We are seeing robust demand in communications across both wireless from five g. deployments and wireline from data center networking upgrades.
This strength is benefiting our industrial instrumentation business, where we shell high performance solutions used in both memory and five g. testing.
And lastly defenses typically a steady business against all economic backdrops. All told these markets represent almost half of 88 revenue over the last year.
From a supply standpoint, we enter our fiscal third quarter at normal capacity levels.
This is quite remarkable and I want to echo vinces appreciation for the dedicated manufacturing teams across the world.
And that brings us to our third quarter outlook <unk>.
Revenue is expected to be flat sequentially at 1.32 billion, plus or minus 70 million, which is a wider range than usual to account for the uncertain environment.
This outlook includes approximately 50 million of revenue that was pushed from second quarter due to capacity constraints.
We are assuming no change in channel inventory in this plan.
We anticipate robust sequential growth incomes modest sequential declines in industrial and consumer and a sharp sequential declined in automotive.
All told.
To be should increase slightly sequentially and decline just under 10% year over year.
We anticipate opt margins to be approximately 38.3, plus or minus 150 beps.
Planning for the tax rate in the quarter to be between 12 and 13%.
And based on these inputs adjusted E.P.S. is expected to be a dollar eight plus or minus 11 cents.
As Vince said, we are confident in our third quarter outlook, we're mindful of the tremendous uncertainty around us our operating model is to plan conservatively and execute aggressively to preserve free cash flow in the near term.
At the same time, we remain focused on the long term continuing to invest to capture and create value across several exciting secular growth areas.
Let me pass it back to Mike now to start arguing.
<unk>, let's get their accuen session limit yourself to one question. After our initial response will give you an opportunity for follow the questions. Cheryl we have a first question. Please.
Thank you I first question comes from John <unk> from Credit Suisse. Your line is open.
Yeah. Good morning, guys. Thanks for them ask the question and congratulations on the followed results given the back backdrop.
That that's I guess the question I'm getting this morning from investors. It just relative to your July quarter guidance. Most of your peers have been guiding anywhere from 10 to 15 percentage points below seasonal you guys are guiding about five percentage points last season on an I guess the question that's being asked as to what extent or are you just not being.
Conservative as your appears to what extent or there's some idiosyncratic drivers.
Could you help us parse that out.
Yeah, Shaun so I think first and foremost we've seen some industry in our health care of business over the last quarter and we that will also continue.
Also generally speaking you know with virtually calmer work from home, we're see again very very strong them or the communication rose.
Optical.
Cable portfolios of <unk>.
The of course five g.
You know, especially in China is the <unk> is moving.
So you know what we're seeing.
What were predicting looking ahead is the the orders through that we see you know whatever about what others are predicting we feel comfortable.
You know based on the right in the areas of just mention our defenses continues.
And to use quite strong Oh. So this is a touch too.
Who that of data centres implode like you know about.
Instrumentation test systems or memory storage and and sounds before our also doing particularly was so.
You know are the overall and go through business holes in there for Sean <unk> multiplying the seasonal to blame and the third or.
So overall, they're the drivers Russians, we expect us to fly in in in the automotive business, but you look at the button takes.
See the quarter shifting.
John that's helped vested interest payment.
I I was going to give a little bit more back on on top of the orders an hour, which may help investors as to why our guy came in where it is so.
Very quickly kind of.
In fact was weak mark came back very strong largely driven by China, but also some pretty strong demand outside from customer concerns and then began to correct. So April was soft continued into may.
We finish with kind of book to Bill above one also in all of our markets, except auto so as we thought about the outlook. We hey, we built our outlook on the expectation that orders are going to continue to flow through the order or best case stabilize.
The Guy that we have out there is is built on 100% backlog coverage, which is much higher than we would normally use when we when we're at this point in the corridor.
We're working that we're working terms with our customers and where and forcing them pretty stringently, so any customers or Disney orders are noncancelable within 35 day window, unless we agreed to grab an exception for that helping to kind of clean through the backlog limit order cancellations. So all in I think that the.
The assumption that reasonable given the amount of uncertainty and we did put a little bit wider range on there plus or minus 70 to reflect the uncertainty.
You'll follow that crank College guys. An adventure. This is my follow up as you mentioned you prepared comments you know the concept of industry Fort autos been around for a while but it does seem like <unk>. You know has the potential of actually shining a a spotlight on that in a way that we have and and it gets in my mind that probably also.
Helps to five g. build out because it's hard to habit intelligent factory for without that five g. backbone, but but I was hoping maybe you can help us to find that market opportunity for you. When you look at sort of the intelligent factory floor what percent of your industrial businesses. It today and how should we think about potential growth rates three to five years out at this really.
Are starting salary.
It's it's a good question John I would say today, what we would consider to be industry 4.0, with a highly flowed connected.
Industrial sector is quite small I think today is probably less than 10% of the solar installations.
Factory on emotion and crosses control systems.
Buffy intelligence, we're getting from any of our customers know is.
There are two things driving.
No need for the deployment of industry, So probably three things one.
The need for them to understand how to gather usually these days.
Improve the outcomes for their customers.
So that assumes automatically that you deploy five G.U. deployed optical connectivity many forms of shorter shorter robles connectivity.
I think also the.
You don't overseeing the fragility you have a supply chain globally, and you know customers are telling us.
They are expected to bring more machine capability into managing the supply chain.
And I think certainly is the the regionalization or the synchronization of supply chains, we can see the pressures there globally.
Not to mention the demographics many of the societies that are producing lots of capital goods and consumer goods.
Like Germany.
China As America begins region license plates and.
We're likely to see the adoption of <unk> more robotics technologies in general So I think that's a long way to go Jong ruined the early innings.
Oh, the industrial 4.0.
The the adoption of that.
Based on who goes over the next question.
Thank you are next question comes from <unk> from Stiefel.
<unk> so.
The morning, Tory Oh, Yeah I.
Thank you uncommitted lessons on the results first question is for for instance, you talked quite a bit about sort of in investing in this in this time frame.
And you highlighted a again medical it in and and industrial what about the ultimatum market Oh, you Oh, you seem sort of a a secular change. There are are you still investing a or will you still be investing is as heavily in automotive going forward.
Well, we've actually been run things Hillary our investments in automotive, particularly in the infotainment the power side of things and I'm also the electrification of electric Bertrand so.
No write notes are very very hard market to read holes in terms of the man and of course of like automotive who's been extremely hard.
By the by the closures globally so.
You know, we we see I would say the two areas of most interest to a story or.
The the infotainment the car experience leveraging for example.
Are there to be technology, our heritage and digital signal processing and audio.
Audio signal processing in general.
Adding for example act of noise cancellation to the portfolio, we're exploring that starting to deploy that no.
So I think the whole infotainment side of things is is an important part of the the go ahead and that's a place where a lot of heritage.
We're we're we're.
We are actually increasing investment just acquired a company actually during the quarter.
To enable us to bring more signal processing to the audio space.
In the electric vehicle area I think it's got a long long road ahead of US you know as.
The the <unk>.
Suffocation today, the portraying the as a portion of overall tar. So it was only about one certainly less than 2% of total car sales. So a long long way to go and that scenario, where we have.
Strong position run our fourth or fifth generation of technology, no product delivery to that sector. So I'd say in those areas, we are actually increasing investments.
Power is another area the cross conduct of power into our business, particularly in Europe.
<unk>, that's an important initiative and we're seeing.
Some very good green shoots there in terms of early stage production of designs of power designs that we've attached to the signal processing portfolio.
I think it's also true to say story about probably on the safety side of things, we've been decreasing our investments over the docile readers pretty and members you'll recall three four years ago. We.
Withdrew most of our investments into areas. So.
I would say safety is more opportunistic infotainment electric par tray and more strategic.
It's hard you your follow up.
Yes that was very helpful. I fall apart <unk> personally I do realize obviously right now the the orders are kind of all over the place, but if if we start to see deterioration well what would be the company's playbook.
Especially I'm thinks like manufacture we utilization inventory you know because it seems like somebody appears have different playbooks.
I'm just wondering you know what what 80 eyes playbook will be in response to potentially in a week or or continues weaker orders thinking.
Sure Yeah. So.
<unk>, let's do doesn't into pieces first think about how we manage our costs. So in the in the near term, how we think about costs and you've seen it in the in the affects result already we have a variable cop structure that is.
Tended to act as a shock absorber and that unwind as revenue falls.
On the discretionary side, we've already frozen hiring or we've essentially how traveling zero, we've exited consultants and any discretionary contractors.
And perhaps most him a impactful is we've deferred are Merritt increase which is usually 2% to 3% euro per year.
We are on track to realize about 35 million of synergies that we announced last year in November and we still have $100 million.
Costs energies that will come through by the end of 2021.
So there are some more permanent actions that we can take and we have taken in the past such as Furloughing employees until demand return. We did this back in 2000 82009 certainly put.
Activities like like a temporary actions on the table.
So they're all items that will think about the.
On the manufacturing side I would emphasize that are utilizations are fairly low right now.
So we're kind of at the trough level inventories are we feel at a good position. So I don't think we have kind of the same inventory exposure that we would have had at the same time last year, we reduced on the balance sheet as well as in the channels. So.
Overall, I think we're well positioned if this breaks a if there's breaks up or should it breakdown, maybe you want to talk more about kind of longer term.
We feel good about the stability the diversity instability of or business.
And you know what the with a profit margins, we generate as a company we're investing to make sure we come out of this this.
This trough stronger company, both in terms of product development as well as a customer engagements. So.
I also believe very strongly in the persistence and the pervasiveness of our technologies, So I believe that.
The story for 80 I got stronger.
Tailwinds that we have the portfolio that we have for the future. So.
Look over all our goal is to take advantage of the disarray.
You know, while I think Prussia uncertain was prepared remarks were.
Were preparing for the worst, but we're executing aggressively.
For the future.
<unk>.
The next question plus.
[noise] hundred text question comes from the topic area from Bank of America Securities. Please go ahead cheer line did something.
Oh, the thanks for taking my question and and congratulations on on the good execution, I'm curious cell, which what and the communication segment just near it did you see any level enough paulenne from China or <unk> and either April are July and then that's neat you know get beyond.
I didn't environment.
Do you see any further <unk> all the restrictions on while they or do you think that share oh wouldn't be shifted over to always competitors. So long. It you can start do a negro communication Tech meant well, let me answer the the second part of your question first so.
We have.
Tremendous coverage, we've got very strong market share across all the providers all the oil firms have for five g.
Across the globe, so irrespective I mean, the networks are going to build.
<unk> will be using our stuff or transceiver technologies are microwave portfolios.
Many many other <unk> technologies and.
So I feel I feel.
Good about the position that were in if share shifts from one to the other we will pick it up.
And.
So the yeah in terms of the man I would say.
We have reconciled so it's pretty clear what the Carter's was saying about the deployment of five g. globally right now.
Oh reconciliation in terms of how we balance.
End of the carriers is with it is very tightly tied to our supply.
So.
We have a good sense for what the cars and looking for and that's how we're planning essentially the the factory the factory loadings.
Support this particular area.
So I don't think of any you asked about.
Are we seeing double ordering souls before what is characteristic in the base station infrastructure market over many many years is that.
You got gyrations, you know when a set of contracts are coming do you see some level of I would say.
You know corny you'd have a certain amount of redundancy both in but it's pretty typical what we're seeing right now in terms of five g. is no different.
We've seen in terms of the dynamics, how forgy operated in terms of.
I'll do my run the call what we said publicly about that large customer in China, a year ago, we talk about them being a mid single digit customer they've been reduced meaningfully since that time or more on the low single digit per cent of sales today as we look forward to our third code M.B. on we don't see that changing from there.
<unk> Yeah may have <unk>. Thank you on gross margins, how should be pink about the trajectory from here given all the ports intakes of makes and and I think <unk> under utilization and but then you also mentioned some of the costs synergy so let's assume sands stay at symbol.
Their level, it's even going into your queue for what can gross margins still them. Thank you sure yeah. Good question.
So.
Our model is 70% long term and you saw that in good times, we can get up to 72% plus and in more challenging times like now we're sort of in the high sixties, so through and through a cycle, we can average 70%.
Getting to 70% is very macro dependent as demand gets better we are going to get utilization pale when we have the as I mentioned utilizations are near trough levels now.
We have what we have in our favor is an additional 100 million of costs of goods synergies. So that should begin to to give some tail wind as well to to our our gross margins and then as a as 2021 returned to to kind of growth that numbers than.
I feel that says that it's reasonable for us to kind of you get to get back to that 70% level.
<unk>.
<unk> on the call on it's the interest of time, we're going to go to one question birchler to get through a bit more.
Thank you.
Question comes from an <unk> from the moment. Please go ahead to your line so.
Hi, Thank you very much I had a question for you on a.
<unk> I'll picks trajectory, how should we be thinking about it and then on Capitol location.
50 assume that given all the volatility that share buybacks taste paused for now.
How her her AAPEX, we are in our six quarter of consecutive improvement in a box. Some of that was was is clearly actively managing the the spend levels down but some of it is also the result of this kobe situation where travel.
Is that a is that a frame I think it's reasonable to expect that as a.
Businesses, reopen and customer expectations start to change and we need to get back in front of in front of folks at some of that is going to climb and as well as some other discretionary spending will come back and so I wouldn't I wouldn't run this level of <unk> <unk> too long, but I think.
You've seen that we have been incredibly diligent with managing our topic or the last year and a half and that's a that's a muscle that 80 I had built and we're not going to let that go.
In terms of how to think about the the capital allocation.
Our our framework really hasn't changed the first call is to invest in the business and whether that is a organic or inorganic and then after that it's really 100% return.
Free cash flow after debt repayments. So the plan for 2020, we increased a dividend by 15% we're still on intending to run to reduce debt by three to 500 million in this fiscal year and then everything after that goes back to shareholders either through dividend or or share.
So I would expect that to that we would be a you know if business holds holds out that we would be reactivating the share repo in the coming orders.
Okay, Thanks to embrace.
<unk>.
Thank you. My next question comes from all seem more from thank you base. Your line is open.
Hi, guys. Congrats on that strong results and challenging times just wanted to go back to the automotive side, you said it would be down sharply. So just a couple of questions on that do you mean sequential year over year or both and given the timing of when the auto factories and been shut down and then are turning back on how are you viewing this the shape of that recovery and how much.
Too bad turning back on dynamic influence inside your thoughts from both your July guide and your October outlook conceptually.
Yeah. Thanks for the question Ross, So I think first and foremost we expect sequential annual declines it is extremely hard to read.
The automotive sector right now I think.
It's easier to predict how factories will reopen and how supply will happen I think the bigger questions. What what is going to happen with the man.
And I think we're way we view it is.
You know, we we don't understand the phase of Reopenings right no.
Level of utilization or capacity will they operate so.
I would say, we think it'll be tough going for the remainder of this your normal perhaps we would start to see.
A recovery in the.
You know in the the first off of becoming year.
That's how reviewing it so.
The area that we feel kind of most conviction around in terms of the mind will be for electric vehicles, where.
Our portfolio is making very strong headway, which was originally centre really in China.
Into Europe and of course America as well, so very very hard to read I would say, but.
My sense is that <unk>, we've talked to see.
<unk>.
I'm pretty paltry bottom I think some recovery in the first 21 and.
And Ross I would say that is reflected in our guy we are relatively bearish on automotive in our guide.
Thanks, Ross Thank you.
Our next question.
Thank you. My next question comes from till you should Hari from Goldman Sachs. Your line is open.
Hi, guys can morning, and congrats on a strong results dense I wanted to ask about your a B.M.S. business specific like.
How did that business trend in the corridor, what's the outlook into July.
You can give us an update on customer attraction with your wireless the M.S. solution and to the back half a year and potentially into fiscal year 2021 there'll be helpful. Thank you.
Yeah. So.
The overall in the in the quarter or just gone.
Oh, we.
We saw a.
Modest decline I would say in or B.M.S.
Revenues, but our design or the Zyman <unk>.
Are very very strong I. We're we're set to go to present time, we have somewhere in the region of.
You know 45, 40% to 45% market your it'd be a mess and.
We believe not sure will grow above 50 per cent gives them. The design pipeline that we have and the buttons that we have from customers across the globe as as I mentioned.
In the previous the previous answer that or.
We manage to take what was a very channel centric view of US business, we've been taking it across the globe and.
That's for essentially but not more than a set of things.
Wireless <unk>, we are expecting to see our first production.
Of Oh that particular product.
Happen in the kind of.
I think the second half of 2021 so.
That's a that's how we see it you know we're we're in a great position I think right now in North America, China, and we're also because the penetrate Japan and Europe I think is in the early stages of adoption any kind of meaningful level I feel good about where we are there so.
You know our portfolio highly differentiated there are many pretenders up there, but when it comes to optimizing.
The the miles per charge, we got a you know more than 20 per cent.
Gain in in the along the metrics so.
Overall, it's.
You know, it's a one to two per cent.
Penetration of the of the car sector, it'll probably go to.
25% over the next 510 years.
We're in a very very good position.
To see the the two ones from that time plays out here.
They can tell she will go to our last question [noise].
Thanks.
Thank you and <unk> from City Group. Please go ahead to lie Miss open.
Thanks, guys I guess more of it gets more of a clarification and a question see mentioned that you seen a little bit of weakness in the April may bookings does the guy take into account further weakening in the bookings I. You did you build in any cushion or are you assuming stability from here on out.
Yeah. So I I think we feel we feel good about our guide Chris you know, where we don't we don't put a guide out there that we don't think we can you know based on what we know today, we can get here.
Order her down in April.
Maine was at a a at a slower pace our expectation in the Guy is that orders continued to slow through the quarter or best case might stabilize we've got good coverage from the backlog more than we normally do so we're prepared for some cancellations or pushouts, because we would have we always have.
Some current business in there are trying to control those cancellation for push out as I mentioned by being being pretty tough on the terms that we have for direct or gifting customers and and we've also assumed.
The that the channel is relatively flat inventory levels.
Sequentially so.
We think we've we've calibrated the guide as best as we can knowing what we know today.
Like per shot.
Interest 61, I'll turn the call back for closing comments.
Thanks, everyone for joining us this morning, a copy the transcript will be available on our website ambassador to analog dot com. He also find originally published his G. report engineering, good there as well they scan for joining us <unk> engine analog devices stay healthy.
<unk>.
Concludes today's analog devices comforts call you may now disconnect.
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