Q2 2021 Analog Devices Inc Earnings Call
[music].
Good morning, and welcome to the analog devices second quarter fiscal year, 2021 and earnings conference call, which is being audio webcast via telephone and DAU for the west.
With that I'd like to introduce your host for today's call Mr. Michael Gabelli Senior director of Investor Relations, Sir the floor is yours.
Thank you Cheryl and good morning, everybody. Thanks for joining our second quarter of fiscal 2020 1 call.
With me on the call day are Adi's, CEO, Vincent Roche and Adi's CFO <unk> Mahendra Rajah.
For anyone who missed or at least you can find it and relating financial schedules at Investor day analog dot com and.
And to the disclosures and information were about to discuss includes forward looking statements, which are subject to certain risks and uncertainties. As further described and earnings release and our most recent 10-Q and other periodic reports and materials filed with SEC.
Actual results could differ materially from the forward looking information as these statements reflect our expectations only as of date of this call. We undertake no obligation to update these statements except as required by law.
Our comments today will also include non-GAAP financial measures, which exclude special items and.
Comparing our results to our historical performance and special items are also excluded from prior periods.
Reconciliations of these non-GAAP measures to the most comparable GAAP measures and additional information about our non-GAAP measures are included in today's earnings release, and with that I'll turn over to 80, Icl's Vincent Roche Vince.
Thank you, Mike and good morning to you walls. So I'm very pleased to share with you that we delivered record revenue and earnings from the second quarter.
<unk> the high end of our outlook.
This strength was driven by our disciplined operational execution and our ability to capture the value presented as our solutions become more vital and the mother and digital economy.
The supply and demand dynamics and our industry have been well publicized broadly speaking the economic recovery has materialized faster and stronger than initially anticipated, placing unprecedented stress on supply chains globally.
Late last year.
I moved with speed and agility proactively making capital investments to add capacity positioning us to navigate this disruption and better serve our customers.
That said, we like many others and the industry will face a supply constrained environment through the balance of 2021.
Despite this backdrop, we're positioned for a strong second half as our continued capital investments are aligned with robust demand.
Moving to a summary of our results revenue was $1 $66 billion, increasing 26% year over year. The strength was broad based and highlighted by record quarters for our industrial and automotive markets.
Gross margin expanded to nearly 71% and operating margin to approximately 42%.
Adjusted EPS.
And $1 50 for increased 43% year over year.
Over the trailing 12 months, we generated $2 $2 billion of free cash flow. This equates to a record 36% free cash flow margin, maintaining our position and the top 10% of the S&P 500.
So overall I'm very proud how the Adi team executed this quarter to deliver these impressive results.
And really I innovation is the root of how we generate value and.
And to maintain our virtuous cycle of innovation driven success, we invest more than $1 billion and R&D annually.
This commitment coupled with the diversity of our business across customers products and applications.
Positions us to deliver long term profitable growth and let me share a few customer highlights with you.
Adi solutions our.
Our embedded across the electrification ecosystem from developing and managing the vehicle battery to the distribution and storage across the digital grid.
With the rapid shift to E vs, we're seeing new and increasing investments and battery manufacturing capacity.
This quarter, we secured a design win with the supplier of 1 of the world's top battery producers.
Our innovative solution reduces system caused by half by.
Integrating all measurement control and diagnostics functions.
And our portfolio of wired and wireless BMS provides unmatched accuracy to deliver market, leading vehicle range as we grow and diversify our BMS business.
This quarter, we added Volvo as well as 3 additional large auto manufacturers, including a prominent luxury brands in Europe, and 2 leading brands in Asia.
Moving on to energy infrastructure here energy storage systems are required to make renewable energy a reality and to build the charging infrastructure to support EV proliferation.
Our precision signal chain and power management, and BMS portfolios deliver the level of accuracy necessary to ensure consistent supply across the digital grid.
We have design wins with more than 80% of the top customers.
From traditional energy and industrial companies to new entrance.
Another area of increasing importance for Adi's connectivity.
Which of course is becoming more pervasive across demographics and industries presenting new opportunities for us.
For example, and our communications business, we announced the complete video platform for the 5 <unk> Ora and ecosystem.
This radio platform builds on our market, leading integrated transceiver position by expanding into the digital front end.
Our full system solution enables significant size and performance improvements, while reducing customers design cycles.
Oprah and represents a new vector of growth and the communications market by enabling new entrants and the applications such as private networks that support connected factories.
In addition to partnerships with Intel and Marvell.
We are working with key carriers and system integrators to enable this ecosystem.
And our space business, our beam, forming solution will be used and telesat Lightspeed Leo satellite constellation.
<unk> to launch in late 2023.
This win and speaks to the breadth and depth of our RF portfolio and domain expertise at Adi, which is supporting the adoption broadly of Leo Communications satellites.
Additionally, we continue to have strong design momentum across our diversified industrial market.
Largest stickiest and most profitable business at Adi.
Over the years, we've established a heritage of providing the most precise and efficient solutions required by our factory automation customers.
I believe we're at a tipping point and industrial for zero as customers are looking to add sensing edge processing and connectivity to make supply chains more robust more efficient and flexible.
We recently won and ultra high frequency wireless solution at a key automation company.
Our solution is being used and advanced robotics systems to reduce downtime and costs on the wired side.
Customers are beginning to upgrade to.
Deterministic Ethernet to ensure machines are constantly connected and monitored.
This quarter, we secured numerous design wins for our robust Ethernet solution and.
Including 2 of the largest European industrial machine manufacturers.
We recently hosted a deep dive on our instrumentation and test business.
This is truly a performance driven market that requires 80 is most advanced technology and solutions.
Making it a great fit for our high performance precision signal chain and power and RF portfolios.
Our broad diverse instrumentation business comprised of automated test equipment electronic test and measurement and scientific instruments is aligned with all secular growth trends across our industry.
The increase and complexity of these applications is driving the need for solutions with more advanced technology capabilities. As a result, we expect some to increase by over 20% and the next 5 years.
Now these examples represent only a fraction of the incredible work across ATI.
And our team is partnering with our customers every day to develop increasingly innovative technologies that not only create successful business outcomes, but also enrich people's lives and leave a greater impact on our world.
To that and I wanted to share and exciting updates on how we're leveraging innovation to advance our mission of engineering good.
And in April.
And we launched and innovation accelerator with the woods hole oceanographic institution.
As part of this program, we will be combining Adi's engineers and technologies with who is science and technology platforms to continuously monitor critical oceanographic conditions.
This effort supports our overall claimants agenda.
Which includes our commitment to achieving carbon neutrality by 2030.
And net zero emissions by 2050.
We also published our 2020 corporate responsibility report last week, which provides additional information on how our technologies will continue to play a major role and improving our standard of living while protecting our planetary health.
So in closing.
The last year has underscored has semiconductors is the bedrock of the modern digital economy and information age are increasingly important to accelerating digitalization across all industries.
We're encouraged by our results this quarter and the momentum and our pipeline and sets the stage for continued profitable growth in the years ahead.
So with that I'll hand, you over to <unk> to take you through the financial details. Thank you Vince.
Good morning, and let me add my welcome to our second quarter earnings call.
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.
Adi delivered a record second quarter as revenue operating margin and EPS finished above the high end of our outlook.
As I mentioned last quarter upside to our second quarter outlook would be predicated on our ability to increase production.
And thanks to early strategic investments in capacity as well as strong execution by our manufacturing operations team, we did just that.
Now, let's look at performance by end market.
Industrial.
Represented 59% of revenue and increased 14% sequentially and 36% year over year.
And this quarter marks the second consecutive all time high for industrial.
We saw strength across all applications and geographies with all sub segments growing double digits sequentially and year over year.
Communications.
Represented 17% of revenue.
Fell slightly sequentially and was flat year over year.
Wireline increased double digits year over year, which balanced softness and wireless.
As we outlined and the last call <unk> builds have been muted year to date, However, we anticipate and momentum to pick up as fiber deployments and broadened globally in the second half of this year, especially in North America now that the C band auction is complete.
Automotive represented 16% of revenue and increased 5% sequentially and 42% year over year again, we saw double digit growth across every major application as industry production has picked up notably from a year ago.
BMS grew the fastest more than doubling year over year.
And lastly, consumer decreased 12% sequentially in the seasonally weaker second quarter and represented 9% of revenue.
Importantly, <unk>.
Consumer grew 8% year over year positioning us to deliver growth in fiscal 'twenty 1.
And now covering the rest of the P&L gross margin finished just under 71% up 90 basis points sequentially, and 320 basis points year over year, and higher utilization and better product mix.
We expect additional gross margin expansion in the second half and we realized savings from the consolidation of our manufacturing operations.
Opex and the quarter was $484 million up sequentially and year over year Merit increases went into effect during the second quarter and we also reported higher variable comp due to the strong results.
This netted operating margin of 41, 7%.
Non op expenses were $44 million down nearly 10% from the prior year driven by lower interest expense.
Our tax rate was approximately 12%.
And all in adjusted EPS of $1 50 for exceeded the high end of our outlook and marks and all time high.
Now moving on to the balance sheet.
Relative to the first quarter inventory dollars increased 23 million to a record $641 million.
This increase was driven entirely by raw material and work and process.
As we ramp utilization to better meet for the strong customer demand.
Days of inventory were relatively unchanged at 118.
Weeks of channel inventory finished lower sequentially once again and due to the strong sell through at our <unk>, We anticipate remaining below our 7 to 8 week target through the end of the year.
Capex for the quarter was $59 million, bringing our year to date total to $127 million.
For more than double compared to the second half of 2020, we.
We expect to continue to increase capital investments and for Capex to trend above our long term model of 4% this year.
Turning to cash flow, we generated $2 2 billion over the trailing 12 months, which equates to a record 36% for free cash flow margin.
And over the same period, we returned approximately 75% our free cash flow after debt repayments via dividends and repose.
This is below our long term target as we paused our buyback program given the pandemic uncertainty and the pending Maxim deal.
We ended the second quarter with $1 3 billion of cash and equivalents on our balance sheet and our net leverage is now 1 3 on a trailing 12.
We're comfortable with the leverage and do not plan to reduce debt as such we remain committed to return 100% for free cash flow to shareholders.
So let me finish up with our third quarter outlook.
Revenue is expected to be $1, 7 billion, plus or minus $70 million up sequentially as additional capacity comes online.
This is in line with seasonality after a very strong Q2.
At the midpoint, we expect each of our <unk> markets to increase slightly sequentially and consumer to be up low double digits.
Based on the midpoint of guide op margin is expected to be $42, 5 plus or minus 100 bps.
And our tax rate is expected to fall between 11 and 13%.
Based on these inputs adjusted EPS is expected to be $1, 61, plus or minus 11 and such.
So in summary, Adi delivered a very strong quarter highlighted by record revenue earnings and free cash flow conversion.
Importantly, bookings and backlog remains very strong and we're continuing to invest to increase production for the balance of the year, giving us great confidence that our second half will be stronger than our first.
We've also made meaningful progress towards closing the Mac with him acquisition.
Shortly after the deal closes we are going to hold a conference call to provide an update regarding our capital return plans as a reminder, once combined we anticipate having more than $3 billion of cash and a leverage ratio well below 1 let.
Let me now pass it back to Mike for the Q&A. Thanks.
Thanks for shop, let's get the Q&A session. We ask that you limit yourself to 1 question and.
In order to allow for additional participants on the call. This morning.
You've got a follow up question. Please re queue and we will take questions. If time allows with that Charles <unk>. Our first question. Please.
Thank you.
And my telephone Dani if you have a question. Please press star and the number 1 on your phone and you for your questions has been answered and you wish to be removed from the queue. Please press the pound key.
And this thing all day speakerphone, please pick up for handset when you're asking a question, we'll pause for just a moment to compile the Q&A roster.
And our first question comes from John <unk> from Credit Suisse. Please go ahead. Your line is open yes.
And good morning, guys. Congratulations on the solid result for Shaun.
90 days ago, when you sort of guided for the April quarter. The key gating factor what is your ability to gross supply I'm curious as you look at the July quarter.
Are you still and a supply constrained environment and I guess more importantly, given the internal capex youre spending and your work with your foundry partners. How do we think about your ability to gross supply beyond sort of the July quarter guidance.
So John and thanks for the question, Yes, we are constrained.
We've got a very very positive book to Bill.
But.
What we have forecast for the July quarter factors and all the elements of supply across silicon supply both internally and externally.
As well as all the backend operations Assembly and test so.
And we feel very confident and that number and.
But you know beyond that there is opportunity to ship more there is more demand out there but it.
At least and the July quarter, we feel very comfortable with what we have.
Forecast.
And how do we think about supply growth beyond July.
July a good proxy to what you should be able to do sequentially for the next couple of quarters or are you getting a particularly strong uplift in July and things moderate going forward.
Thank you.
Ultimately everything will depend on demand, but we're increasing our capacity, we're getting more wafer supply in general.
And we are as a percent said in his remarks.
You know, we've been investing and capital equipment inside the company to expand our backend operations. So you'll see sequential improvements and adi's output over the coming months, So as <unk> said and the second half of the year, given our confidence and supply.
We will have a better second half from first half.
Thanks, John helpful. Our next question.
Thank you. Our next question comes from Tony and Sandburg from Stifel. Please go ahead. Your line is open.
Yes, Thank you and co debt lasers and the record results.
And for some keep talks about this day inventory being sort of way below the 78 week target.
Could you could you tell us where exactly the numbers all right now.
And and also <unk>.
Do you expect to get back to send them to eat at some point or is this kind of like a new norm now we're.
And the channel is going to be sort of running below what it has historically.
Yeah. Thanks, Thanks Torry.
So inventory is very lean and we entered the quarter below 7 weeks and it decreased again in the quarter. So we would like to build inventory back up its unlikely that that's going to happen whatever they get their hands on sales through immediately so.
And until the supply gets improved over the coming quarters, I don't think Youll see us return to normal.
Normal.
Inventory levels and the channel, but I would say that we do maintain the view that sort of that that 7 to 8 weeks is the right balance for us to have in the channel.
Great. Thank you.
Thanks Tara.
Thank you. Our next question comes from Vivek Arya from Bank of America Securities. Please go ahead. Your line is open.
Thanks for taking my question.
Vincent I was hoping you could quantify lead times and and book to Bill and various end markets to the extent.
Possible, but our lead times stretched the most and importantly.
What are you doing to prevent double ordering are you implementing any from price noncancelable programs.
Some of your peers are any perspective on how do we.
Quantify the state of supply demand imbalance and how do we get some assurance that.
This will be resolved.
I guess peacefully is 1 word that comes to mind I think that'd be very helpful.
Yes.
Thank you. Thank you.
Maybe just to start with some comments on where demand is coming from so we're exploring we're experiencing significant growth and demand and it's very broad based all of our markets and when you when you Rewind and think how we got here our customers entered the pandemic with pretty lean inventories than.
And then we had this synchronized government stimulus both fiscal and monetary.
We had debt we have very strong growth during the pandemic of consumer electronics with the high use of cloud compute connectivity, we're coming out of the pandemic now with the GDP driving industrial and that's driving companies to rethink, both where they manufacture and upgrading the style by which they.
<unk> so on the supply side, we've been planning for additional capacity as Vince mentioned since since late summer of 2020 and as we add capacity our revenue forecast is increasing and that's really what helped us deliver a better Q2 guide up for Q3 and feel good about Q4 so.
I think supply will eventually match.
Demand, but I don't see demand really going away. So this feels and given the secular drivers behind it. It feels that this is going to be with us for a while.
Book to Bill for the past quarter was above 1 and it was the same for all and Mark. So it's again very broad based and I think it's really just a reflection of the and.
Incredible role that Adi's products play across across the manufacturing ecosystem.
And any.
Programs that you might have put in place.
Yes.
Well, so I guess a few a few comments to make there we are we are.
Additionally, managing our orders, we're working with our customers, both large and small across all markets to understand the demand timing and to allocate the supply based on end demand remember that while we report on a poa basis, we actually run the business on Pos So we look through distribution to understand what's happening at custom.
And customers we've also put in a.
Noncancelable Nonreturnable for up to 90 days to help give us better visibility into the backlog and that.
Helps customers sort of manage what they what they can expect to get from us. So at this point I would say the focus really has been on communication and that's the feedback I think Vincent heard from customers as well is that what's important to them is communicating what they're going to get and when theyre going to get it. So they can plan their respective downstream production requirements.
Thank you.
Your next question please.
And our next question comes from and Bruce <unk> from BMO. Please go ahead. Your line is open.
Alright, Thank you very much push on for Vincent I wanted to just unpack the gross margin.
And then that you made for Sun.
Excuse me.
You are at the model 70 plus percent and.
And when you talk about.
Gross margin Inc.
Commencing getting better what's the right way to think about it and you.
You referred to.
Cost savings that you'll be getting from factory consolidation.
And a impact from pricing and then kind.
And related to that how are you managing the input cost which seem to be going up across the board versus pricing and is that also playing a factor and the gross margin and Saudi and related hedges would you be building inventory as you go through the second day. Thank you.
Thanks, and rich do you have a few more add ons to that.
And I will.
Let's start with let's do a quick 1 on price. So net impact of pricing changes are immaterial to to gross margin. So we are managing our cost increases.
And to net those out.
From a from a net from a net price standpoint, the gross margin lift that youre seeing really is the productivity that we're driving so I did say in the first quarter earnings call debt that would be the bottom of gross margin for the year and we would expect sequential improvement youre seeing that in the Q2 results are printed you see that and the guide that we've given for Q3.
That is coming from the manufacturing consolidation of the linear factory closure, which we have talked about and and also some.
Some step up in and utilization.
So that's kind of a tactical way to think about how gross margins evolve over the balance of this year, our model remains 70% and I don't know Vince if you want to.
And give some guide on how we think about gross margins long term debt will look the root of our value creation really is innovation and we're spending over $1 billion a year and.
We like to have the highest performing products out there, but we got well paid for and.
I think also the diversity of our product application and customer domains and helps.
Helps us protect margins as we've seen through the pandemic here so.
85%, we've got 125 customers hundreds and 25000 customers.
And 85% of our sales comes from products that individually contribute less and 0.1% of our revenue or even less so and that's the model of the company. So there's a lot of resilience and a lot of optionality and resilience built into it.
Thanks and ratio for Bob Thank you.
Thank you. Our next question comes from Blayne Curtis from Barclays. Please go ahead. Your line is open.
Hey, good afternoon, and thanks for taking my question and.
Good morning, and.
And just kind of curious on the industrial segment I think last quarter, you talked about 2 segments being at peak you talked about all being out and April quarter. So just any color by segment, there and if any more of them are at record revenue that would be helpful. Thanks.
Yes, what we've seen.
This is a very very highly diversified business, we saw a broad growth across all of the individual sectors.
In fact, all applications grew.
<unk> grew double digits year over year on sequentially.
And I believe there's a lot more upside to come.
And because we're in a multi year growth cycle, driven by secular trends industry for zero, etc.
And I would say.
We've seen really strong acceleration and the automation sector and.
I think that's driven by.
Such things as the need for onshoring more flexibility.
And more robust and connected supply chains.
If I just pick healthcare.
And it has already been a multi year growth market for Adi.
And you know the pandemic kind of underscores the importance of information technology and.
Managing our health care systems.
And so we've seen an acceleration and our digital health care business.
As we begin to migrate.
The hospital environment to the clinic and the home with point of care solutions, our health and healthcare.
Care anywhere and mentality and.
As I've mentioned in the prepared remarks as well.
The energy sector with the move to renewables.
This charging infrastructure, that's being laid and to support these.
Electric vehicles.
Those are some of the areas that we're seeing strongest growth.
Within the industrial area, but I think automation underpins it.
Also I would say.
I've been very pleased with the results that we're getting into very broad.
Bench scientific and test equipment.
Analytics equivalent and so and so it's been very very broad.
And blend and just to touch on your last point about the the record applications, you're right I think last quarter is it 2 or 3 had records.
And we increased that they were all 4 of our 6 applications are a record. So I think I'd Echo what Vince said is that we're early stages of this cycle and you have to at some point, we expect all of our applications to be at record probably next year or so and with Apple and go to next question. Please.
Thank you. Our next question comes from Toshi.
And Harry from Goldman Sachs. Please go ahead your line is open.
Thank you for taking the question and congrats on the strong results Vince I had a multi part question on your BMS business.
Guys talked about revenue more than doubling and the quarter.
Was hoping you could you could speak to kind of the breadth of your customer profile, there and the quarter on a year over year basis and.
And I guess more importantly.
And based on some of the comments that you've made on past calls and also this call as it relates to your design win pipeline.
Should we expect some of these wireless BMS projects to ramp and fiscal 'twenty, 2 or is it more fiscal 'twenty 3 and beyond.
And lastly.
As it pertains to the combination of of with with Maxim How should we think about how your how your position and BMS.
Evolves overtime post post the combination thank you.
Yes, Thanks Toshi.
Well first off where the market share leader.
And the electric vehicle battery management systems, and as you know.
We have really 2 portfolios, we have the existing we like to call. It the wired portfolio and more traditional way of moving data.
From the battery system.
And we've introduced a wireless version of a robust cognitive radio based wireless system.
So I think the next 12.
For months will be driven by the traditional wired battery technology and after that and <unk>.
<unk> 2 into 2023, we'll begin to see the upsurge of the wireless battery technology.
And that will complement the wired.
So.
What I believe will happen as you know today, what are we got 2 3 million cars per year being produced and electric vehicles being produced and let's go to move to we believe somewhere.
Tenex at least over the next 7 years.
So this is a multi multi year cycle.
Yes.
And where our BMS chips.
So they are being used and over half of the top 10, selling EV cars globally, and we're gaining share and each of those areas.
Today, our best position is in North America and China.
As I mentioned in the prepared remarks, and we're beginning to make room trucks and <unk>.
Europe, as well as Japan and Korea so.
Ultimately if a manufacturer wants the most miles per charge and they're going to turn to Adi. So that's what we're working.
Thanks for share grow next question. Please.
Sure I will take our next question.
Yes.
Yes.
Cheryl.
Sure can you hear us.
Yeah.
Please go ahead Ross Seymore from Deutsche Bank. Your line is open.
Hi, guys can you hear me yes.
Yes, we can Ross.
Okay, great and I'm glad to share all came back.
Just had a quick couple of questions on your communications business I guess, the tactical sense. It looked like it was better than you expected in the quarter. The April quarter was that specific to the wired and wireless side or was it just the supply coming on and then more importantly, looking forward can you give a little bit more color on whats your expectations are for the wireless side, obviously, we had some difficult comps with what <unk>.
And with Huawei year over year, but how do we think about that returning to year over year growth given the second half commentary that you talked about with some ramps and North America and beyond.
Yeah. Thanks so.
I haven't I said in the prepared remarks of debt the communications business for the second quarter was really driven by very strong growth and the wired I think it would.
Up double digits.
Wireless remains lumpy.
But we feel pretty good that comms has bottomed in the second quarter, and we're going to see growth and the second half I think and I'll, let Vince jump in with some of the customer conversations you've been having but with the with you.
Completion of the C band auction, we feel very good that you're now going to see the build out of <unk> for which we are the largest participant certainly and with the transceiver product for <unk> for both the U S and and starting to see that and in a in Europe as well.
Yeah, So Ross what I wanted to mention is that at this point in time and rest of World is 3 times larger than China for Adi I think that's very very important to remember.
And we're certainly seeing 5 G momentum pick up on a global basis.
North America, we've recently, obviously the C band auction is complete and.
And we're beginning to see orders today that we expect will accelerate during 2022 and beyond.
And even Europe, where it is.
Theres been.
Re lethargy and upgrading their communication systems and general over the last several years, we're beginning to see signs of life and the deployment of <unk>.
India is also India has a significant government from the program to make 5 jewelry LLC there, we're beginning to participate and trials.
And last but not least is Oregon.
We already have revenue as a company with Rakuten the online shopping.
Tony in Japan.
And we're very well positioned given our ecosystem.
Position, there to unlock potential and what is a brand new stream of revenue, particularly I think.
As it gets deployed into private networks for machines.
Alright, thank you for clarification.
Just 1 quick clarification from what Prasad said double digits and the wired was that a year over year or sequential comment. Thank you.
Year over year year over year. Thank you.
Thanks Ross.
And our next question comes from Stacy <unk> from Bernstein Research. Please go ahead. Your line is open.
Hi, guys. Thanks for taking my question I actually wanted to follow up on that <unk> question. So if I go back to last quarter, you'd kind of talked on the comp trajectory down a bit and and it wasn't China statement.
I just wanted to clarify is that doesn't sound like that's changed it does sound like the uptick Youre seeing right now is outside of China U S. Europe.
Andy I guess is that correct.
Why do you see that uptick 90 days, where expectations for that I think 90 days ago versus today and then what are your broad thoughts on <unk> rollout in China going forward from from here, how does that how does the rest of that play out given given all the dynamics that are happening here.
Yes, So I think first and foremost China is opportunistic for Adi at this point, we will settle and I think lots of components and they're going to lose more opportunistic.
For.
You can talk about the specifics.
I think Stacy we have always said that that we expected <unk> deployment in North America to come next and we followed by Europe.
When we gave you the the commentary for the <unk>.
Leading into the second quarter, we were focused on that pause in China, but we have seen now that the auctions are complete and protect critically Verizon being much more public about what they are and what.
They intend to do and the <unk> space.
And Vince mentioned order for starting to come in for that so.
The the trajectory.
And for communications or for wireless specifically, it's going to it's going to be up in the second half.
Thanks, Jay Thank you and.
Can we go to our last question. Please.
Thank you and our last question comes from William Stein from tourists Securities. Please go ahead. Your line is great.
Great. Thanks, so much for squeezing me in guys I would like to ask about the cost function we have.
<unk> potential.
Potential looming problems I think 1 is inflation broadly.
And not just materials potentially labor as well.
And then on the Opex side, you know the return to work.
Face to face and sort of operation suggest maybe we start spending on travel and things like that and I Wonder if you can comment as to how we might sensitize our models to these factors. Thank you.
So let me let me take the inflation piece first so.
I think it was umbrage, who asked the question and we are seeing cost increases from our supply base, but we feel that we're guiding margins on a net basis are going to be neutral for that because we are where we can pushing that price. So I I'm not as concerned about the inflation side, we have been very.
We have been very mindful of the labor side, and I would say that the data. We're seeing is that it's taking us about a week longer than normal to fill jobs at the factory level. So so our U S. Our U S factories are facing a little bit a little bit longer time to fill jobs, but it's not a it's not anywhere.
And as dramatic as what we're hearing and the media in terms of in terms of filling these high paying manufacturing jobs and.
And then for return to office that is that's something we spend a lot of time on.
There's no doubt that there will be some return to travel I think it's I think that's going to be universal across all companies, but more specifically to how adi's thinking about return to office, maybe I'll, let Vince talk about how we're thinking about that.
Yeah. So we've been to choose a 3 day for wheat policy to start with Adi.
For those who have been working remotely and.
And we'll see where things go from there, but my sense is for.
On the Opex side of things.
And we'll probably not get back to per capita travel spend entertainment spend and so on and so forth.
The other thing and I'll remind you will is that we worked relentlessly and company and taking costs out of the business. So we work hard and cost of goods, we've worked hard and making the business efficient.
Below the cost of goods line as well so.
Inflation is nothing new we will see how and how it moves over the next and.
And if we see an acceleration and inflation and we'll figure out what actions to take.
So we shouldnt be modeling some step up cost function and opex related to travel and such activities.
And you've already guided to for for I think from.
Bonuses and such but for travel mill.
Well I think that's true and.
What do you look at the expenses today our opex.
And as laden with some very rich bonus payouts, because the business and in terms of growth and profitability is doing very very low.
But you know we will.
Over and over time, I expect growth will moderate and the bonuses will also moderate as well.
And maybe I can wrap by saying we were expecting second half revenue to be strong. We indicated the second half gross margins are going to continue to increase which is going to give you incredible leverage and therefore there is no reason you won't see a meaningful lift in op margin as each quarter rolls out so.
And all of that is going to translate into more cash flow, which will have available to deploy since we're not doing any further debt reduction that's coming back to shareholders.
Great. Thanks, so much.
Thanks will.
Thanks, everyone for joining us this morning, a copy of the transcript will be available on our website. Reconciliations will also be there you can also find a new CSR report that Vince outlined in his script on our analog and Investor relations homepage and with that thanks for joining us and your continued support of Adi.
This concludes today's analog devices conference call you may now disconnect.
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