Q4 2022 Analog Devices Inc Earnings Call
Good morning, and welcome to the analog devices fourth quarter and fiscal year 2022 earnings conference call.
Which is being audio webcast via telephone and over the web.
As a reminder, this event is being recorded.
I'd now like to introduce your host for today's call Ms.
Mr. Michael Zuccarelli, Vice President of Investor Relations and SG&A.
Sir the floor is yours.
Thank you Betsy and good morning, everybody. Thanks for joining our fourth quarter and fiscal 2022 conference call.
With me on the call today are Adi C O and sure Vincent Roche and Adi's CFO <unk> Mahendra Rajah.
For anyone who missed the release you can find it and relating financial schedules at investor analog Dot com.
Now onto the disclosures.
If it makes you were about to discuss includes forward looking statements, which are subject to certain risks and uncertainties. As further described in our earnings release, and our periodic reports and other materials filed with SEC.
Actual results could differ materially from the forward looking information as these statements reflect our expectations only after the date of this call. We undertake no obligation to update these statements except as required by law are.
Our comments today will also include non-GAAP financial measures, which exclude special items when comparing our results to our historical performance special items are also excluded from prior periods reconciliations of these non-GAAP measures to their most directly comparable GAAP measures and additional information about our non-GAAP measures are included in today's earnings release, and with that I'll turn it over to Adi's CEO and chair.
Vince Vince.
Thank you, Mike and good morning to you all well I'm really extremely pleased to share that we delivered another record quarter capping off what was a banner year for Adi.
Fourth quarter revenue was 3.25 billion and adjusted EPS was $2 73.
And both at the high end of our outlook.
For the fiscal year revenue was $12 billion up an impressive 26% year over year on a combined basis.
Our industrial automotive and communications markets delivered all time high revenues.
And our consumer business continued to grow despite industry wide weakness.
Adjusted EPS increased by nearly 50% to.
The $9 57.
We also delivered on our commitment to return 100% of free cash flow to shareholders in 'twenty to returning $4 $6 billion through share repurchases and dividends.
These results not only exemplify the strength of our portfolio, but also our deep customer focus and the hard work of our employees to fortify Adi's buttoned.
To that end in my recent conversations with customers the message has been very clear.
While we're not immune to supply disruptions idiot service.
Quality and support throughout this challenging time continues to be outstanding.
Importantly, the sentiment is shared by customers of all sizes and across all markets.
As a result, our customers are calling upon adi to engage in longer term more strategic collaborations to develop solutions that further empower the intelligent edge.
So to ensure we remain at the forefront of technological advancements in customer service we.
We invested $1 $7 billion in R&D and $700 million in Capex in FY 'twenty two.
Now, let me start with R&D, our investments are targeted at strengthening our foundational high performance analog franchises.
As well as moving up the stack to create more complete solutions for our customers.
A Prime example is our Apollo platform, which we previewed at our Investor day in April Apollo's flexible high speed signal processing platform.
With unmatched levels of functionality integration and performance.
Ubiquitous for all customers, but especially appealing to those in the broad market.
During the quarter, we began sampling this innovative platform.
With our aerospace communications and instrumentation customers and their feedback has been extremely positive.
Turning now to the operation side over the last year, we invested a record amount of capex to increase our manufacturing output.
And then 'twenty two 'twenty three we are once again investing aggressively in our U S and European factories to significantly expand our capacity.
These investments will create a more flexible and cost effective hybrid manufacturing model by increasing our swing capacity to around 70% of revenue in the coming years.
Our R&D and supply chain investments are essential to support our design win pipeline, which expanded by more than 10% in 'twenty two.
This growth was led by our automotive energy systems, and digital health care businesses.
Notably our growth in automotive was underpinned by battery management systems, our BMS, which now has an opportunity pipeline nearing $4 billion.
This year, they do manufacturers' designs, and our BMS solutions, including two that plan to utilize our wireless platform.
Our strong leadership position combined with increasing EV penetration globally.
With me great confidence in our future growth prospects.
Looking though at some selected design activity in the quarter.
In industrial automation.
We were designed into an advanced diagnostic system that monitors machine health.
Global supplier for energy exploration.
Our system solution approach enables an approximate 50% reduction in size.
And lowers wiring costs meaningfully.
In aerospace and defense, we Wouldnt RF module programs with multiple defense Prime contractors are module is integrate hundreds of components to simplify the design process for our customers.
While increasing our content from hundreds to thousands of dollars per system.
And industrial instrumentation, we secured wins of two market leaders of next generation high voltage testers for electric vehicles and renewable energy systems.
The combination of our high voltage processes and precision technology enables us to deliver accurate reliable and efficient testing required to scale the manufacturing of these systems.
And lastly, and communications, we extended our leadership in five G radio systems with our transceiver portfolio.
Winning additional share our key suppliers.
These new wins position us even better as five gene networks rollout globally, especially in India.
Oh run begins to proliferate.
Importantly, our design pipeline is beginning to benefit from cross selling our Adi and Maxim portfolios.
This puts us on a path to achieve our target $1 billion in revenue synergies.
For example.
At a European auto manufacturer, we built upon our strong audio connectivity positioned to cross sell our high speed G. M. S. L technology connecting their advanced driver systems.
We're also capturing new opportunities with Jim S O in the industrial market.
Last quarter for example, our technology was designed into autonomous order fulfillment systems at one of the largest e-commerce companies.
We're also making great inroads with our broader power portfolio, where our opportunity pipeline increased by double digits last year.
Our increased breadth is helping us to better match customers' performance and power tradeoffs across more applications, expanding our power sun to nearly $10 billion.
For example, at a leading European industrial customer.
Our position in mid voltage power for distributed control systems.
Enabled us to pull through additional power content and.
Precision signal chain sockets, thereby doubling our content per system.
Our expanding pipeline and significant revenue synergy opportunities instilled greater diversity and resilience into our business, while adding new growth vectors and taken together I'm confident in our ability to bend the growth curve and move from our historical mid single digit growth rate.
So our long term model of 7% to 10%.
So in summary, while the macro cross currents are creating an abundance of uncertainty.
ATI has successfully navigated many slowdowns over the course of our 57 year history.
The strength of our franchise allows us to invest through business cycles, and ensuring we continue to deliver breakthrough innovation.
Keeping our relevance to our customers and capture the emerging secular opportunities at the intelligent edge.
And so with that I'll pass you over to Chris Schott.
Thank you Vince.
Let me add my welcome to our fourth quarter earnings call.
My comments today with the exception of revenue will be on an adjusted basis, which excludes special items outlined in today's press release.
We closed fiscal 2022, as our second consecutive year of record revenue and profit.
We delivered sequential growth each quarter, achieving a new all time high of 12 billion in revenue.
Gross margins of 73, 6% increased 270 basis points due to favorable product mix stronger utilization and cost synergies.
Operating margin of 49, 4% increased 700 basis points, reflecting strong execution on opex synergies.
And adjusted EPS increased nearly 50% to $9 57.
For the fourth quarter revenue was $3 to 5 billion, finishing at the high end of our outlook.
As I cover the performance by end market, both for the quarter and full year My growth comments are on an adjusted combined basis where applicable.
Industrial our most diverse and profitable end market hit another all time high and represented 51% of quarterly revenue.
Growth was broad based with each major application increasing sequentially and year over year.
For the year industrial expanded 29% with growth in each business, notably digital health care was up over 30% and has now achieved seven straight record years.
This consistent success in health care underscores the breath of our Ics and subsystem solutions in a key secular growth market, where such performance is critical.
Automotive, which represented 21% of quarterly revenue achieved another record year growing both sequentially and year over year.
For the year auto was up 31% a favorable mix of premium vehicles are growing BMS, Jean Michel H, B and functional safe power franchises combined with enhanced value capture drove significant growth compared to Saar.
Together these franchises of BMS G M Michel H, B and functional safe power represent over $1 billion of automotive revenue.
Communications, which represented 15% of quarterly revenue.
Another record quarter with strong sequential growth in wireline, while our wireless business was about flat.
For the year Coms grew 27%.
In wireless our strong position in radio signal chains is enabling the five G rollout globally.
And in wireline, our optical and power portfolios benefited from the continued demand for bandwidth.
Lastly, consumer represented 13% of quarterly revenue and was up modestly sequentially and flat year over year.
Despite a challenging year for the broader industry consumer finished up 8%.
This growth is a testament to how we have diversified our consumer business and the innovation premium our products command.
Today, approximately 30% of revenue is derived from long lifecycle prosumer applications, including Nextgen conferencing systems professional Avi and home theater, while the remaining revenue and consumer relates to the faster growing wearables and horrible as well as premium smartphones.
Now I'll move down the P&L for the fourth quarter.
Gross margin was 74% up 310 basis points year over year.
Driven by favorable product mix and synergy capture.
Opex was $744 million.
Down slightly sequentially due to the realization of additional synergies.
And operating margin increased 800 basis points year over year.
Finishing at a record 51, 1% as we exited the year with roughly $350 million of synergies realized across opex and cost of goods in our run rate.
This incredible pace of synergy capture would not have been possible without the dedication of our integration office and the cross functional teams that supported them.
Yes.
Non op expenses were $57 million and the tax rate was 12, 2%.
All told adjusted EPS came in at $2 73 up 58% year over year.
Moving on to the balance sheet, we ended the quarter with approximately $1 5 billion of cash and equivalents and our net leverage ratio continues.
To remain below one.
Days of inventory increased to 140, while channel inventory was once again below our target range of seven to eight weeks.
Let me provide some additional details on our inventory.
So first during these uncertain times, we believe it is prudent to temporarily hold more finished goods on our balance sheet instead of shipping into the channel.
This provides us with enhanced flexibility to better align supply with end customer demand across regions and markets.
Second raw material and with our increasing as we begin to rebuild our die bank.
Over the last couple of years or die bank, which drastically reduced and in some cases shipped 50% below optimal levels.
Die Bank inventory is highly cost efficient and it's critical for customer service as it can be used for different markets and customers.
We believe higher inventory is crucial to reducing lead times as we look to return to our four to eight week target service level overtime. Given these actions, we expect inventory to increase in the near term before trending back down as we balanced die bank rebuild with finished goods depreciation.
Depletion.
Moving to cash flow items, Capex was $305 million for the quarter and $699 million for the year or 6% of revenue.
As we outlined at our Investor Day, we expect elevated capex through 2023 at around high single digits as a percentage of revenue.
Yeah.
For fiscal 2022, we generated $3 8 billion of free cash flow or 31% of revenue. This was lower than normal given our higher capital intensity and one time transaction and restructuring costs.
These near term headwinds were not unexpected when we outlined our long term free cash flow target at our Investor day, and we remain committed to growing free cash flow to 40% of revenue.
As a reminder, we target 100% free cash flow return.
We aim to grow our dividend at a 10% CAGR through this cycle with the remaining cash used for share count reduction.
And during the year, we returned more than 100% our free cash flow to shareholders, we repurchased $3 $1 billion in shares.
Reducing share count by nearly 4%, while paying $1 5 billion of dividends.
So let me close with a brief update on the current operating backdrop as.
As we noted last quarter.
Uncertain and slowing macroeconomic environment has had some impact on demand.
However, after a couple of months of slowing orders, we saw bookings stabilized during the quarter at what we'd consider a relatively normal levels for entering our first quarter.
Not surprisingly bookings remained the strongest in the industrial and auto while communications and consumer are weaker.
We're guiding first quarter revenue to $3, one 5 billion plus or minus $100 million.
Given this environment, we thought it might be helpful to be a little more prescriptive in our outlook by market.
So in the first quarter, we expect auto to be up slightly sequentially industrial about flat com.
Comms to decline by mid single digits and consumer to be down double digits sequentially.
At the midpoint of our outlook revenue will be up high teens year over year.
And our BTB markets, increasing over 20%.
Op margins are expected to be 50% plus or minus 70 bps.
Tax rate.
As expected to be between 12% to 14% and based on these inputs adjusted EPS should be $2 60, plus or minus 10.
So stepping back we are well positioned in the near term, but the environment remains highly variable and dynamic Adi like the rest of the industry is not immune to a softer macro environment and thus we remain cautious yet optimistic.
Longer term, we have over a year of backlog and continued momentum in our pipeline.
We also have high flexibility with our hybrid manufacturing model and several opex levers in our toolkit to support our industry, leading margins and maintain robust cash returns to shareholders.
So let me now pass it back to Mike for the Q&A.
Thanks, Vishal unless it's my favorite part of the call. The Q&A session. We ask that you limit yourself to one question in order to allow for additional participants on the call. This morning.
A follow up question. Please re queue and we'll take your question. If time allows with that we have our first question. Please.
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Yeah.
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Well pause for just a moment to compile the Q&A roster.
Our first question today comes from tore Svanberg with Stifel. Please go ahead.
Yes, thank you and congratulations on another record quarter.
Then just a question for you when you talked about.
Design wins.
Some of the design win activity, we continue to hear more and more of those system solutions.
And I was just wondering if you could add a little bit more color on how your growth is being driven by higher asp's I'm, not I'm, not suggesting higher pricing I'm talking about higher asps because of your products, obviously moving up the value chain.
To more of a system solution perspective.
Yeah. So thanks Torry.
Firstly, if you look at our Asps compare to the unloved sector.
Have a three <unk> multiple.
And versus our closest competitor, we have a five X multiple on that.
But diversion has been growing over the last the last several years. So you know we decided.
Quite a while ago with us across the markets and the applications that we really cared about that what was really important for us to do was.
Boil down the increasing complexity that our customers are dealing with.
And their product development systems.
And activities and so essentially what we've done is we've taken the complexity into Adi.
We get to the other side of that complexity with the quality of our innovations.
Policy to be able to couple of many many different facets of our portfolio together.
In areas like power management, we're building these three D stuff.
Module systems, sometimes with asps of hundreds of dollars.
You know if you look at our five G Radio systems same thing recombine microwave we combined did a conversion power digital algorithms and so on and so forth. So.
We have you know what.
The company, we believe in diversity of technologies solutions customers and.
That choice of business model towards at the end of the day and how we execute it gives us the richer asps.
When compared with our competitors.
Very helpful. Thank you Laurie.
Next question please.
The next question comes from CJ Muse with Evercore. Please go ahead.
Yeah. Good morning. Thank you for taking the question and happy early Thanksgiving I guess I was hoping to probe a bit more around the cautious but optimistic view you talked about order stabilizing and a backlog that extends out 12 months or.
So I. So I guess first question can you talk about what kind of scrubbing you've done on that backlog.
And then secondly, you know based on that how does that inform your outlook heading into fiscal 'twenty three thanks, so much.
Thanks P J, let me.
Let me take that.
That and help give some give some color on the demand.
And bookings.
So if you step back and think about last year. The first half of the year, we had orders at historical highs.
And then last quarter on the earnings call, we called out that order for beginning to slow.
And Thats a decline actually continued into the fourth quarter. However.
We saw orders start to stabilize about midway through the fourth quarter and into the first couple of weeks here of the first quarter.
So.
That was bookings are strongest in industrial and auto not surprising and weaker in comms and consumer which I reflected in the in the guide.
From a geo standpoint, we'd say that not surprising we're seeing weakness in Asia, especially China, but North America, and Europe are holding up well.
So given the combination of orders stabilizing and the backlog coverage that we have out we feel pretty good about the near term there is uncertainty out there and things could change fast, but that's sort of what's driving our our sort of cautious optimism.
Yeah, one other thing C. J to note we've said before the signal we watch most carefully in terms of.
Really trying to understand demand is sell through rather than seven so that I think gives us a deeper degree of reality and the match between true demand in.
On supply.
Thank you thanks.
Thanks C J.
The next question comes from Vivek Arya with Bank of America. Please go ahead.
Alright. Thank you so much I actually wanted to follow up on that question.
Are you surprised why your orders and bookings are holding up better even though all the headlines D. C from from a macro perspective seem to be getting tougher. So what what is helping you and then specifically in within your industrial business is it fair to think that factory automation is perhaps the more.
Most macro explore spark.
And if yes, how should we think about that specific part of your most macro exports segment of it in the industrial business going into next year.
Yeah.
So.
Well, let me start with the with the automation question I've talked with a lot of the automation customers over the last while.
And.
<unk> to be I would say.
Bullish expectation I mean, theyre not immune from the macro I think some of our customers are experiencing some soft cancellations in their business, but.
If you look at what's happening we're going to see the life Sciences transform we're in the early stages of small batch processing in the life Sciences for manufacturing for example, the energy sector is another area, where particularly the American and the U S based automation.
Customers a lot of their businesses.
Are.
They have a very large portion in the in the energy sector oil and gas for example, and that is likely to remain strong. So if that's the bedrock that I think that will remain strong for for.
For several years to come we are seeing onshore.
<unk> re shoring, we're seeing movement.
A matter of factoring for example into India for the first time in a serious way. So my sense is.
The industry warm to run the macroeconomic conditions, but overall I think the.
The lending in terms of where demand will be will be softer than probably normal.
Yes, maybe vivek just first just to emphasize are something that we said in the in the prepared remarks, all sub segments in industrial.
Grew in the in the fourth quarter and and we feel pretty good about where we are from a from a strength in industrial versus the other markets.
I'd look at it two ways first from a supply standpoint, as we were seeing demand softening in other markets.
Had that have the ability to use our hybrid model to get more wafers from external partners and we are biasing. This additional supply into the industrial market, which has remained resilient and strong.
At the same time recall, we made a decision early in the in the supply disruption to make sure that we were taking care of our broad market and our smaller customers who tend to be more on the industrial side.
From a demand standpoint, the strength and resilience in the industrial kind of speaks to where we play.
We have extremely high share in those markets and maybe to note versus our peers.
Some of our peers have cited weakness in I think they are calling it consumer industrial.
We on the other hand put that business into our consumer we call. It the the prosumer business professional audio video et cetera, so when comparing us to peers, you'll see that our industrial maybe more pure industrial.
Yeah, I think as well.
For the last decade, 12, 13 years, we have been.
Treating industrial is the bedrock of the company. So it gets the first call in R&D investments customer engagements.
And you know never have we been more diverse in terms of geographies customer coverage depth of coverage and depth of engagement.
So and also we have product life cycles that stretch into the decades with very very stable pricing. So I think all those factors combined to.
To make this an extremely strong business currently and we're very very bullish about the future here as well.
Thank you.
Thanks Vivek.
The next question comes from Joshua bought Alterra with Cowen. Please go ahead.
Hey, guys. Thanks for taking my question and let me Echo happy Thanksgiving.
I wanted to ask about inventory levels and thank you in the prepared remarks for all the color there.
We understand the finished goods and die bank dynamics, along with the lean channel levels, but I was wondering what range would would we be at the point, where you'd have to start taking proactive proactive measures to lower inventories.
We fully realize you haven't given it.
Tori target, but can you help us just directionally.
Understand how youre thinking about that thank you.
Yeah, Thanks, Safra and welcome to welcome to Adi coverage.
So let me let me start with the <unk>.
Fourth quarter balance sheet, our days are up to about 140 and the channel is is flattish and it's still below our desired 17th with target. So the growth in inventory that you are seeing in our balance sheet is coming for a couple of different drivers certainly inflation for our cost of goods.
Sales growth, which requires us to have more coverage of of inventory and then the strategic decisions. We made in the prepared remarks. So I do just want to go through that one more time here. So we are temporarily put a hold more finished goods versus putting it into the channel because we believe that gives us the flexibility to allow.
The supply with end customer demand across regions and markets a bad outcome for us would be to give product to a particular distributor who doesn't have an end customer demand for that product where someone else in a different market or geography is in need.
Second the.
The Die Bank has really been dried out over the last couple of years and I think I've said it.
Some levels below 50% of where we want it so die bank for us and for folks who may be less familiar with it. This is a product that has finished a front end, but before it goes to our assembly and test. This allows us to get it through the backend in roughly four weeks. So its quick turn and it gives us Max.
Mhm flexibility to put it across different markets. So investing in the die Bank will help us get our service levels, which are critical for us given the focus we have on customer service critical for us to get those those levels back up. So the result is.
We expect higher days in the first half and then it will trend back down as finished goods burnout.
And the Die Bank comes to where we would like it to be so.
Our goal for the inventory is to get our lead times down to our to our old target, which was roughly 90% of our goods can be shipped within four to eight weeks and given the long life of our products, we always carry a pretty minimal risk of obsolescence.
Thanks, and just one thing to add you asked about utilization when we think about taking them down one thing I wanted to point out is about our swing capacity and a cross qualification. So before we pulled out our internal utilizations will bring what we can back in from external internal to support Utilizations on our gross margins.
I appreciate the color. Thank you guys and thanks for the warm welcome.
Yes.
Yeah.
The next question today comes from <unk> Srivastava with BMO capital. Please go ahead.
Hi, Thank you good morning, guys.
Guys.
I'm going to ask the same question I think we're all struggling with it you guys won a lot of accolades for being Super transparent last earnings call.
Talking about the order trends.
I think that May cost. The rate question were you surprised is there a seasonality to it I mean, nobody doubts here.
This thing and how strong you are in your chosen markets and Sean Thanks for clarifying the pool schumer versus other companies, calling its legacy industrial.
But is there a seasonal aspect to it as well that orders stabilize because it's very contrary to what.
Seeing hearing from other companies report, including many industrial companies.
So last time, you had said that you expected, although order cancellations with very small you expected them to climb in the current quarter or so.
I would love to get a little bit more color on that and then a real quick tactical one on lead times.
The lead times now thank you sure.
Sure Yeah, let me let me.
I'll just make a comment on cancellations so we.
We provided cancellations as a metric that we watch in the third quarter.
Because we wanted to give everyone. Some context that we saw an inflection happening with orders. So it was in the spirit of transparency. However, I don't want to get into a pattern of reporting cancellation data every quarter. So if it was something meaningful we would have called it out which we didn't so you can read that for what it is.
I would say that unlike others in the industry, we are proactively analyzing our backlog and working with customers to remove orders that they no longer want given the rapidly changing environment. So this strategy for us is to seek out cancellation. It helps us align our backlog with current demand and it really gives us.
Your visibility into where the supply needs and what we need to build so that has increased our confidence in the quality of the backlog. We have it is still the coverages out still over a year, but it is down sequentially and so while we're always mindful that there can be some continued noise in.
That backlog.
We feel we feel pretty good about both the guide and as we mentioned the near term.
Yes, I think the diversity is what <unk> of the business in general is stronger than it's ever been.
We're getting benefit we're winning share in the power management market.
Sector of our portfolio.
And you.
I think if you look at where we are in the automotive sector, where we're getting a very strong tailwind from.
From the electrification of the vehicle effect.
We're getting a lot of share in general I think within cabin.
Electric vehicles, so I think we've got some.
We've got some tailwind.
Our transcending the macro cycle here as well the only part of the business I would say that has a certain cyclical.
Timber two of note is the consumer area, where we have seen kind of the normal pattern there.
Which happens at the tail end of the year.
And you had a question on lead times embraced the the lead times actually and then of course, they have come down I would say, they're still extremely high and much higher they want them to get in for Sean talked about how he wants to how he oh, we want to increase our inventory to bring down those lead times, but we have some projects are on time and some products are our lead times are 52 weeks. So lead times have come down overall sequentially from.
<unk> and that's reflected in kind of our outlook our backlog cancellations everything that we gave you.
Thank you Mike I appreciate the transparency of all this.
Thanks, everyone.
The next question comes from Steve <unk> with Bernstein. Please go ahead.
Hi, guys. Thanks for taking my questions I had a quick housekeeping question and then a broader one a housekeeping question you had an extra week.
In Q1, 18, so Q1 'twenty three will be five years later is there an extra week in the guide at all and I'm on the broader question you talked about some of the Opex levers that you have I think last quarter, you had talked about like 15% revenue down year, you can keep gross margins above 70, I guess the question is do you still believe that and what would.
Opex due <unk>.
In a scenario like that what are some of the levers you would pull.
Yeah. He said I'll do the housekeeping no I guess are all of them at a very very strong, giving you thought it would be a 14 week quarter is not our first quarter and 23 is a 13 week quarter or for next 14 week quarter will be in 2024, so to repeat the outlook for <unk> is a 13 week quarter.
Okay and.
I think your question really is on the.
The downturn scenario analysis, I'll, just I'll restate that.
Stacy we've covered that a few times, but.
We put our we put our gross margin floor out there at 70% and we did that because we have confidence that that we have the levers given the flexibility of our hybrid manufacturing model and the resiliency of our business that are there.
But it's unlikely that we're going to pass through that so.
So we tested that at a down 15% and what we've shared with folks in the past is that a down <unk>. We're quite comfortable that we can stay north of that 70% and the opex levers for us would be the you know about 80% of our Opex is.
Fix or or.
Less variable in nature, which leaves us about 20% on the levers that we can work with to ensure that we are we keep operating margins north of 40% I will say that for 2023.
Our commitment is and as Vince often says we run this company for the long term. So we are we are committed to continuing to invest throughout the course of 'twenty three will obviously be mindful of the environment and if we see a change that warrants us to take action you can count on us to take action.
But but we are at least for the next quarter to expect us to continue to to make the right decisions for the long term health of the business.
But it sounds like Opex ticks up a little bit into Q1 as well just based on what you just said.
You read it well Stacy.
Got it. Thank you guys appreciate it thanks, so much thanks Stacy.
Yeah.
The next question comes from William Stein with Chewy Securities. Please go ahead.
Thanks.
Thing to hit on the inventory question yet again.
Done a very straightforward good job of explaining what's going on in in your own inventory and it sounds like distribution is still below your target, even though on their balance sheets.
Cross all their suppliers it looks like they are elevated.
But we've seen the other parts of the supply chain in particular, the manufacturing services companies, which I imagine are big.
Percentage of sort.
Sort of your counterparty.
Sales transactions and I'm wondering to what degree you've scrubbed that.
Half channel have customer however, you want to look at it.
For inventory that could hurt demand going forward. Thank you.
Thanks for the Great question, Let me Oh, let me do the easy part of that and that is it.
Sell in is essentially equal to sell through so from a channel standpoint, we are we're well aligned and our channel partners are not building inventory I made the comment that we're holding some finished goods on our own balance sheet.
From a customer standpoint, I think Vince has had a lot of conversations with customers. So I'm going to pass to him to talk about what are you hearing from them.
Yeah, I don't think our customers are in the mode of building safety stocks. There are mismatches I think there is the.
The well described Goldman screw problem, it's probably a basin compared to where it was six months ago, but I don't think customers. There's no major inventory building going on right now.
Hum.
I think our customers are doing their best to match their orders.
And on the products product supply.
To be able to create finished goods so they're not there yet I think there is still some.
Served demand that customers are trying to fulfill so.
But we're working very closely with our customers as we've said, we take our signals from sell through and we're working with our customers diligently across all 125000 of them big and small to make sure that we get the best.
The best match between what they need and what we're able to deliver.
What I'm hearing in general is yes, we haven't serviced all of the demand.
All of the customers have needed, but in general we've been very transparent.
Customers are very pleased with our customer service.
And I think it positions us very very well coming out of the supply crunch to be able to deepen our engagement with our customers.
Both on the R&D side as well as the supply chain side and customers are increasingly interested to partner with companies like Adi.
Both of those dimensions.
We're ready.
And what we're seeing in the pipeline, where we're seeing it in the pipeline growth.
Great. Thank you.
Thanks, Bill well go to our last question. Please.
The last question today comes from <unk> Hari with Goldman Sachs. Please go ahead.
Thank you so much for squeezing me in I had one quick housekeeping question and another broader question in terms of the housekeeping question I was curious.
What did pricing do in fiscal year 'twenty two on a pro forma basis I think the business grew.
What is it around 25% pro forma how much of that was pricing and as you think about fiscal 'twenty three or a calendar 'twenty three is the expectation for foundry costs to increase in the out year as well and then my broader question is.
Probably for Vince as you think about the full year full year 'twenty three.
Based on your backlog based on your design wins and customer conversations, which end markets or applications are you. Most excited about in terms of contribution to growth I realize you run a diverse business and that's the beauty of Adi, but if you were to single out a couple where your expectations are the highest which ones would they be and which end markets or applications would you be.
Most worried about thank you.
Sure. Thanks, Toshi, let me take the first one quickly so for for 'twenty two growth was fairly balanced and about half of that is coming from asps, but.
But I do want to emphasize something that we've said over the course of all of 'twenty two.
<unk>.
We passed cost through to customers, we did not use that environment to raise our gross margins that was how we did the calculation of how much price to pass onto our customer was based on the input costs that were relevant to those customers. So with that I'll, let Vince take the more interesting part.
Yeah. Thanks, <unk>. So yeah I think in terms of 23, the markets that have been performing very very well for the company.
Over over the last couple of years, particularly automotive, which we've already talked about the electrification of the vehicle, we're very very well positioned there.
And we're winning a lot of share in the cabin electronics as well.
The new display systems, which are very very complex.
The dashboard displays need a lot of very very clever power electronics. So we're.
Well positioned.
From an industrial perspective as well as.
Digital health care has been growing at the company.
In double digits for the last seven years or thereabouts, we expect to see that continue.
Also aerospace and defense, that's likely to be a very brisk business, it's performing well for Adi no.
I believe at least for the next five years, we will see the stellar growth in that area.
And energy our energy and sustainability businesses are also beginning to.
Really go on the uptick so.
Where am I concerned I'm not really concerned about the business in general given the diversity that we have diversity of customers products applications.
Five G perhaps.
We will see what is likely to be weakness in Europe offset by growth in India growth an overrun.
Steadiness in the U S.
And that.
That kind of summarizes how we think about things.
Great. Thank you so much.
Thanks, Toshi here, thanks, everyone for joining us on the call. This morning.
Jonathan I will be at CES. This year hosting meetings. We also have a booth on the showroom floor, where we have technology demos across auto health care and consumer we hope to see you there and with that have a great Thanksgiving and thanks for joining the call.
Okay.
Yeah.
This concludes today's analog devices conference call you may now disconnect.