Q4 2023 Analog Devices Inc Earnings Call
Good morning, and welcome to the analog devices fourth quarter fiscal year 2023 earnings conference call, which is being audio webcast via telephone and over the web.
Now I'd like to introduce your host for today's call Mr. Michael Lucarelli, Vice President of Investor Relations and SPN eight Sir the floor is yours.
Thank you Abigail and good morning, everybody. Thanks for joining our fourth quarter of fiscal 2023 conference call.
On the call there are adi's CEO and chair of Vincent Roche Adi's interim CFO, Jim Walker.
Anyone who missed or at least you can find it.
I have two schedules at investor analog com.
Our disclosures the information we're about to discuss includes forward looking statements, which are subject to certain risks and uncertainties as far as described in our earnings release, and our parents reports and other materials filed with the SEC.
Actual results could differ materially from the forward looking information.
Statements reflect our expectations only as of call today.
We undertake no obligation to update these statements except as required by law.
Our references to gross and operating margin operating and non op expenses tax rate EPS and free cash flow will be on a non-GAAP basis, which excludes special items.
When comparing our results of our historical performance special items are also excluded from prior periods.
Reconciliations of these non-GAAP measures to their most directly comparable GAAP measures.
Additional information about non-GAAP measures are included in today's earnings release.
Two comments before I go prepared remarks.
We adjusted our mapping to better align revenue to customer end markets.
Slight changes or end market mix with industrial increasing in each of the other markets slightly lower these changes are reflected on our web schedule on the quarterly results section for the last three years and second one more quick reminder, the first quarter of 'twenty 'twenty four is a 14 week quarter.
I'll turn it over to Adi's CEO and chair visit.
Thank you very much Mike under very good morning to you all.
Though the industry is obviously moving through a more challenging period of the business cycle I'm very pleased to share that we're preserving the strength of our financial performance, but are preparing for the market's recovery.
Fourth quarter revenue was $2 $7 billion led by double digit year over year growth in our automotive sector.
Combination of careful expense management, and our employees commitment to high standards of execution.
Enabled us to deliver operating margins of 44, 7% and EPS of $2 and one <unk> for the quarter.
For the fiscal year 'twenty, three again set new high watermarks.
With revenue, reaching $12 3 billion supported by all time highs in the industrial and automotive sectors.
This resulted in EPS of $10.09 up 5% from a year ago.
Notably we returned a record $4 6 billion to shareholders in 2023 exceeding our 100% free cash flow return targets.
Since the closing of Maxim just over two years ago, Adi has returned roughly $12 billion to shareholders or nearly 15% of our market cap.
Over the same time, we have reduced our share count by more than 6% and increased our dividend per share by 25%.
Now looking to fiscal 'twenty for the near term dynamics remain uncertain.
As you will recall last quarter, we outlined the broad base inventory correction across all markets and geographies.
Reflecting the deteriorating macro conditions and our improving lead times.
Consistent with our view 90 days ago, we expect the customer inventory overhang to persist through the first half of the year.
Challenging times like these confirmed the wisdom and the strength of our business model.
The diversification of our business across customers applications and products.
Helps to limit volatility while preserving profitability.
Building upon that foundation.
We took actions to better ensure we can deliver operating margins in the low forties and solid free cash flow. Despite the revenue decline.
Importantly, however, we are not simply battening down the hatches.
A resilient financial model enables us to continue making the strategic investments necessary to allow us to capitalize on the upside when the business and flex higher.
That longer term focus on conducting is why our customers have the confidence to increasingly depend on us as a key strategic partner.
<unk> been very heartened by my conversations with customers across many markets and geographies over this past quarter.
Despite the near term challenges they share our optimism that the intelligent edge is enabling a future replete with opportunity and.
There are clear about the expanding role that they expect Adi to play in their success.
Our customers optimism.
As reflected in the continued expansion of our design win pipeline.
Which increased by double digits again in 2023.
That growth was enhanced by sustained momentum in our Maxim revenue synergies pipeline, which is tracking ahead of our initial expectations.
We expect synergy driven revenue acceleration in 2025.
Bring us on a path to achieve our goal of more than $1 billion in revenue synergy by 2027.
The combination of our strong design win growth with recurring revenue streams from our 75000 product skus.
Which have average lifespan of a decade or more creates a business with high barriers to entry that is both resilient and rich with growth opportunities.
Now let me share some examples of recent wins with you.
In industrial automation, we are increasingly delivering more complete solutions.
As a top digital factory automation supplier for example, we recently leveraged our anchor position in software configurable aisle to attach additional solutions value across power isolation and connectivity.
As a result, we captured three times, the bill of materials and secured design wins across their entire platform.
Yeah.
And industrial instrumentation.
We've increased our design wins at Src and memory test market leaders.
Our next generation solutions increased channel density and throughput, while reducing energy consumption by up to an incredible 30% per system.
These are critical parameters for testing complex high performance compute Gpus and high bandwidth memory for artificial intelligence systems.
Looking now to automotive electrification momentum continues for our wireless battery management system.
This novel solution enables lower weight, greater scalability and improved manufacturing productivity.
<unk> down the total cost of ownership for our customers, while increasing adi's content.
Last quarter.
We secured our fifth customer a top 10 EV OEM.
We will begin to deploy a wireless solution in their nextgen Evs in 'twenty 'twenty six.
Now Furthermore, during the year.
Adi reinforced our industry, leading position in automotive high performance functionally safe power to that end we.
We won next generation power for Adas systems.
At four top suppliers this past year.
These wins at another growth vector to our automotive franchise, which has benefited from strong momentum across electrification and in cabin connectivity.
This proliferation of Adas is benefiting our high speed <unk> connectivity portfolio.
<unk> has been one of our fastest growing areas and a major revenue synergy generator for us.
In the last year, we were awarded four new wins across leading North American Asian and European Oems.
We're also expanding our opportunity and increasing our ROI, winning multiple design wins in industrial areas.
In adjacent areas such as autonomous robotic systems.
Our cloud infrastructure business is beginning to benefit from the power challenges in connectivity requirements necessary and AI ml systems.
Notably a large hyperscale or designed our high performance power and protection solutions into their next generation AI platform.
And then connectivity <unk>.
Systems are upgrading now to one terabits per second.
And require our highest level of precision control solutions to efficiently support the growth in data generation.
In consumer we want multiple power management sockets in a portable application at a key customer.
These wins truly show the Combinatoria power of our acquisition strategy.
We leveraged our industry, leading silent switcher maxims cost optimized process technology, and our customer relationships to secure these wins.
And lastly in health care.
Maxim strengthened our comprehensive suite of technology for personal monitoring solutions.
Adding sensor <unk>, microcontrollers and ultra low power technologies.
We secured a design win at a leading continuous glucose monitoring customer this year.
Our solution increases the robustness accuracy and power efficiency of their glucose Center center.
Thereby helping to extend its life from days to weeks.
So in summary.
We're proud of another year of record revenue and earnings.
We continue to demonstrate the power of our business model, which delivers results through all phases of the business cycle.
Our continued strong investments in technology and business innovation customer engagement and.
Our hybrid manufacturing model positions, Adi and our customers to take maximum advantage of the opportunities at the intelligent edge when the business recovery arrives.
Now I'd like to pass the call over to Jim over the past 35 years.
Jim has taken on a number of critical financial leadership roles across Adi.
Enabling him to develop a breadth and depth of understanding of our business that very very few possess.
So I am pleased now to have them on my leadership team and to be joined by Jim on today's call over to you Jim.
Thank you for that introduction, Vince I'm excited to be here today, and let me add my welcome to our fourth quarter earnings call.
Starting with a brief recap of fiscal 2023 results.
Revenue increased 2% to $12 3 billion, Mark and Adi's third consecutive record year.
Gross margin of 72, 5% moderated from last year's record result of $73 six.
Operating margin of 48, 9% decreased 50 basis points roughly half the decline of gross margin.
<unk> strong operating expense control.
All told EPS increased 5% to a record $10 nine.
Now moving to fourth quarter results revenue of $2 72 billion declined 12% sequentially and 16% year over year, finishing above the midpoint of our outlook. Despite the challenging operating environment.
Industrial represented 50% of quarterly revenue declined 19% sequentially and 20% year over year as expected, we experienced broad based weakness as inventory adjustments continued across our diverse customer base.
For the full year industrial increased 6% achieving its third straight record result, with strength across instrumentation test energy and aerospace and defense.
Automotive, which represented 27% of quarterly revenue was down slightly sequentially and up 14% year over year, marking 12 straight quarters of double digit growth.
For the year automotive also achieved its third straight record result, increasing 19% with.
With strong growth across our functionally safe power battery management and in cabin connectivity solutions collectively these were up more than 30%.
Communications, which represented 13% of quarterly revenue declined 6% sequentially and 32% versus a record fourth quarter of 2022.
For the year communications decreased 13% with steeper declines in wireless versus wireline.
And lastly, consumer represented 11% of quarterly revenue down, 6% sequentially and 28% year over year.
Consumer decreased 20% in fiscal 2023, driven by industry wide weaker demand and ongoing inventory corrections.
Now on to the rest of the P&L fourth quarter gross margin was 72% down sequentially and year over year, driven by unfavorable product mix lower factory Utilizations and lower revenue.
Opex in the quarter was $692 million down $60 million sequentially.
These significant savings were driven by disciplined expense management and lower variable compensation.
As a result operating margin came in at the higher end of our outlook of 44, 7%.
Non op expense finished at $65 million and a tax rate for the quarter was 12, 5%.
All told EPS was $2, one slightly above our outlook.
Now onto the balance sheet, we ended the quarter with approximately $1 billion of cash and cash equivalents and our net leverage ratio of <unk> nine times.
Inventory decreased nearly $70 million sequentially driven by finished goods.
Inventory also declined as we actively manage sell in to be less than sell through.
Given lower revenue inventory days increased to 188 and channel weeks ticked up slightly.
Ending within our target range of seven to eight weeks.
Now moving on to our cash flow items operating cash for the quarter and the year was $1 2 billion and $4 8 billion respectively Capex.
Capex for the quarter was $476 million and for fiscal 2023 was $1 3 billion.
These capex numbers are gross figures, which do not include the benefits of the investment tax credits or grants related to both the U S and European chips acts.
Full year free cash flow was $3 6 billion or 29% of revenue.
During the year, we returned 130% of free cash flow via roughly $3 billion in share repurchases and $1 7 billion in dividends.
Now moving onto the guidance for the first quarter, which will be on a 14 week basis.
First quarter revenue is expected to be $2 5 billion, plus or minus $100 million.
Once again, we expect sell through to be higher than sell in.
At the midpoint, we expect all end markets to be down sequentially industrial.
<unk> is expected to be down the most followed by consumer and comms with automotive faring the best.
Operating margin is expected to be 41, 5% plus or minus 70 basis points.
Our tax rate is expected to be 11% to 13% and based on these inputs. Adjusted EPS is expected to be $1 70, plus or minus 10.
I will conclude my remarks with a brief update on our current operating backdrop.
As Vince mentioned, we continue to see broad based weakness across markets and geographies as customers work to reduce inventory in a stressed macro backdrop.
Importantly, our lead times are now back to normal levels with 95% of our product shipment within 13 weeks, given our customers' high confidence and timely supply.
Encouragingly during the fourth quarter, we've seen cancellations fall and bookings stabilize.
This gives us greater confidence that the ongoing inventory correction will taper through the first half of the fiscal year.
As we discussed last time, we have taken actions to preserve the integrity of our income statement, our balance sheet and our cash flow statements.
Me provide an update in these areas. We are once again lowering internal utilizations with a goal of significantly reducing inventory.
In the first half of the year.
Our hybrid manufacturing model and ability to swing and external wafers will help us moderate the decline in factory starts.
The unique ability positions us to deliver healthy gross margins. Despite the significant rally revenue declined from a year ago.
Given the enhancements made to our hybrid manufacturing model over the last two years, we now plan to slow the expansion of our internal Fabs and back end facilities. As a result, we expect 2020 for our capex to be between 600 and $800 million or down about 45% versus 2023.
Hi.
Importantly, this capex reduction does not compromise our long term growth our resiliency efforts that gives customers multiple locations to source Adi supply.
And lastly, we took additional steps to structurally reduce our opex.
These actions combined with lower variable comp and seasonally lower spend in the first quarter will result in a slight decline in opex sequentially, even with the extra week.
So in closing our ability to generate operating margins in the low forties, which of our previous highest in the last cycle demonstrates the durability of this franchise and how we've enhanced our operating model over time and with that I'll give it back to Mike for Q&A.
Thanks, Jim and welcome to the call. It's great to have you now, let's get to the Q&A session.
So you limit yourself to one question in order to allow for additional participants on the call. This morning.
Follow up question. Please re queue, we'll take a question of time allows with we have our first question. Please.
Thank you for those participating by telephone dial in if you have a question. Please press star one one on your telephone to enter the queue and your question has been answered or you wish to be removed from the queue. Please press star one again.
If you are listening on a speakerphone. Please pick up the handset when asking a question, we'll pause for just a moment to compile the Q&A roster.
Yeah.
Our first question comes from Ann <unk> Srivastava with BMO. Your line is open.
Alright. Thank you. Thank you very much for taking my question Vince.
Vince looks like order has been restored and the diversified analog world with the it looks like a very normal.
Clicker downturn and what you what you built as a structurally more profitable company holding to 40%.
No 40% operating margin line. My question is on a bottoming process and I know, we're not there yet.
And then just remind us or help us understand metrics.
Following regarding cancellations push outs backlog you did talk about cancellations Jim.
And then kind of related to that is no.
You look at past cycles does auto automotive needs to go down double digit year over year decline as industrials has been there and how should we think about that thank you.
Yes, good morning <unk>. Thank you for the question. So yeah, you know we noted last quarter.
That we believe the inventory digestion issue with last two to three quarters.
And I'd say, given the new information that we have a conviction of that has actually grown.
We have.
Through careful analysis and.
And observation, we've seen inventory digestion and accelerate our largest direct customers across the board across all the various segments.
That we support.
And we're continuing to reduce our channel inventories as well so.
Thank very encouragingly.
Yeah, even with normalized lead times as we've said, we're shipping not kind of 95% of customer request within a quarter, which is very very normal.
We saw against the backdrop of sharp drop in cancellations.
And though the book to Bill was <unk>.
Hello unity in the fourth quarter.
We did see our bookings improved sequentially, so that gives us a lot of confidence.
Two as to what's going on.
Regarding automd.
The motive I'm not sure by the way you know the automotive.
The assumption, you're making is that there could be a double digit drop in automotive I'm not sure about that because.
We know that cars are consuming about.
Yes, 10% more silicon per year.
And in fact were.
We continue to grow in share and the SP and the car. So my own sense is that.
Against what could be a very challenging macro backdrop during 2024.
But of all the elements of our portfolio automotive, we expect will fare best of the mall.
We still have pretty strong confidence that will grow in 2024.
Thank you Vince.
Thanks, Operator next question please.
Our next question.
Our next question comes from Vivek Arya with Bank of America Securities. Your line is open.
Thank you for taking my question Vince I'm trying to reconcile the comments that were made about some stabilization in bookings that sounds like a positive but I think in the prepared remarks. You also said some headwinds that could persist through the first half of the fiscal year, suggesting that April could be sub seasonal.
Quarter, So I know youre not guiding specifically out to April but what is the right way to look at the puts and takes as we think about April <unk>.
It'd be seasonal but would not be seasonal and also.
This extra week from January.
That really gives you that seven 5%.
So we should be taking that out of airports, so any way to help us.
Give us a sense for how the April could shape up would be very helpful. Thank you.
Yeah, well I think it's vivek. Thank you for the question. It's a it's one quarter at a time here you know what I will say contextually is that we expect the inventory overhang to have been depleted.
By the.
By the start of our third quarter, which is in may of this year.
Next year or so.
We still remain pretty confident about that given the dynamics that I just outlined.
But the other parts of.
The cycle that we're really.
I think everybody is seeing pressure from as the macroeconomic climate and.
Particularly.
The decline of semi partners in China. So.
That's the piece I mean that is the piece that isn't well understood.
But.
All that said.
The macro will be the governor on what happens in the second half of the year.
And I think another quarter or so will give us a lot more confidence in terms of.
What is possible in the second half.
So, but I'll, let Jim answer as well give you some particular statistics to underpin our assumptions here.
Thanks, Vince Yes, let me just speak to let me unpack lead times a bit first.
As a as we said you know lead times are now kind of back to where they were 95% of our products are shipping within 13 weeks in and we've seen steady improvement in lead times and <unk>, three and <unk> and I guess from the refresh side of that is from a customer viewpoint customers have now adjusted to those shorter lead times.
And our order rates basically.
In the fourth quarter basically stabilized in fact picked up in <unk> versus <unk>. So so that's good news for us as the.
Customers have sharpened their signal and to us as Vince said, our book to Bill is still below one there, but it is kind of the first lines. There. Additionally, cancellations.
And the fourth quarter were down meaningfully.
For the first time and probably close to a year.
And cancellations on a shorter time, France. We're also very very low so so so that's good for us.
From a channel perspective, we're being cautious we continue to basically ship into the channel less than our sell through.
Which basically will position us well.
But when the upswing of Paris.
And from an end market viewpoint, let me just clause on that point.
All markets in <unk>, it will be down on a quarter to quarter.
Yes, that's it Mike, Yes, and it's very confusing with a 13 or 14 week quarter Youre right <unk> I'll kind of add some commentary around that how to think about that normally <unk> from <unk> and a 13 week to 13 week basis up about 5% give him a instead of inventory overhang and bookings getting better.
It still feels like we should probably grow some but I don't think 5% is likely why theres still an inventory overhang going on so if you think 13 week to 13 week, we're about flattish plus or minus <unk> <unk>, that's probably a good way to think about it that means if you include the extra week.
We're down about 5% plus or minus sequentially. So I hope that helps Rebecca little bit because it is confusing and where that can go to our next question. Please thank.
Thank you.
One moment for our next question.
Our next question comes from Joseph Moore with Morgan Stanley. Your line is open.
Great. Thank you.
Wonder now that you're in a revenue downturn that looks more severe than in.
We saw the last cycle, what are you seeing in terms of pricing and.
Are people you obviously raise prices during the upturn are people asking you to give that back in and is that a different conversation and kind of a like for like basis versus approaching kind of a new design win activity.
Yeah. Thanks, Joe So look I think overall.
The pricing of our existing portfolio is very very resilient very stable.
And.
I think something to note as well is that every new generation of product that we build is capturing more value.
So if you look at the legacy it's very stable you look at the legacy franchise, we've got tremendous stability.
<unk> <unk> value per new socket.
And I don't see any particular change we as a company play at the high end of the performance curve, which enables us to get this innovation premium that is a very very critical part of our gross margin structure.
And our revenue growth.
And.
Our job is to continue to invest to make sure that we stay on the cutting edge.
Well rewarded for that we fight.
We fight very very intensely at the inception of new designs.
But as I said in the prepared remarks, Joe we're seeing generally speaking our pipeline of new product design wins as well as the.
The more established products continue to grow quarter by quarter year over year. So.
I feel confident that the.
Pricing that we have.
<unk> managed to increase over the last couple of years, two and a half years that Airbus to reflect the increased cost of goods will hold those prices.
So overall, we are bullish about where we are in.
What the pricing environment holds.
In the future.
Okay. Thank you thanks, Joe.
The next question.
Okay.
Our next question comes from Stacy <unk> with Bernstein Research Your line is open.
Hi, guys. Thanks for taking my questions.
I had a question on Opex and gross margins into Q1. So you said opex was down slightly even with the extra week. So if I assume that is down it's down a little bit it would imply that.
Normalized like 13 week Opex would be running around I don't know, 640%, maybe a little lower.
Once we get through into Q2 with the extra week rolls off is that the right sort of like steady state Opex run rate to think about as we go through the year and some of are there some other drivers.
And I guess, if those numbers are right it sort of implies gross margins in.
Implied in Q1, maybe maybe a little below 70, maybe 69 is that the right kind of level that you're thinking about is the revenue is going to drop here.
Okay.
Yes Stacy.
It's Jim let me take that let me take the margin one first and then I'll talk about the the Opex for <unk> for the quarter.
As many as many imports there's many levers to the gross margin is there's revenue that's priced as mix as factory loading utilization levels and let me just try to unpack that a bit.
Vince mentioned on the pricing side basically that stable. So that's not a drag to gross margins as we move forward.
On the revenue side basically went down.
At the midpoint of our first quarter guide on a 13 week basis is down approaching 30% from our previous peak.
So basically revenue is a headwind for us there.
<unk> mix basically is unfavorable as well as you heard in my prepared remarks industrial.
Industrial was down 19, and 20% last quarter on a year over year and sequential basis and that will be down again in first quarter. So mix is a headwind for us when you put all those puts and takes together.
We would expect basically gross margin will fall below 70% in the first half of the year at these trough levels I think.
If you think about something in the 68% 69% range.
Sure.
It's probably a good range for this trough revenue range.
<unk>.
So that's kind of the gross margin on the Opex side.
As I mentioned, our fourth you Opex basically.
It was down about $60 million on a sequential basis.
This was the combination of of of reducing discretionary spend and of course, a much lower.
Variable comp looking into <unk>, we expect that to be down again, even with the extra week.
And it's fair to say that probably you can think about 1% to 2% there.
This reduction relates to the actions that we structurally talk to reduce opex.
As well as a low a typical seasonal spend in <unk> as well.
We don't guide to <unk>, but just to give you a sense there.
When you look at <unk>, it's probably best to compare that.
To the <unk>, which was all like 13 to 13 week comparison and when you're looking at for Q2.
<unk> 23 versus <unk> 24, given some of the structural modest reductions we had made we'd expect opex on <unk> to be down a few percent from the Q4 Q operating levels.
So I hope that helps.
That's helpful. Thank you so much guys.
Thanks, Stacy I always appreciate your two part one part question with that next question. Please.
One moment our next question.
Our next question comes from Chris Danley with Citi. Your line is open.
Hey, Thanks gang.
Yes, just a question on on industrial you know historically this has been a pretty.
Growing sector for you guys, but it seems like it's the.
The revenue decline in the industrial is worse than the overall company.
Can you just talk about why that is and maybe broader speaking.
Is are the are the bookings or the revenue falling more because the macro is worse than expected.
The inventory situation out there as just worse than you guys thought do you think youll be able to hold that 70% gross margin floor for that fiscal 'twenty four.
Yeah. Thanks, Chris So yeah look we've come off a record year for for Adi and for the industrial sector.
But let's say in the second half of 'twenty, three we began to see momentum slow on the on the order side of things.
In the fourth quarter, it's true to say that.
Weakness in the industrial sector broadened and hit all the various market segments with one exception of the aerospace and defense area.
And I think when we look into.
224.
The weaker macro backdrop.
And.
We expect the inventory digestion to continue through the first half.
Particularly at the broad market customers, who are suffering most here.
So I think as Jim said, when we talk about gross margins the the weaker industrial over the first half of the year.
Weaker mix if you like.
Will impact the gross margins.
Further trough period here, we're thinking kind of 68, 69%.
As reasonable assumptions for gross margin in that period of time so.
It really is at this point, it's an adjustment of.
Inventories at our customers.
How fast we.
Experienced the recovery will determine on the macro.
Again.
It's true to say during the first half of this year, we do expect to get this overhang of inventory behind us and get back to a more normalized growth pattern in the second half of the year.
Jim you want to take a company, yes, Chris I think just a couple of points there.
Vince talked about at the trough revenue gross margins in the 68% 69% range.
<unk> gross margins at 70% for the year I think that was the first part of your question as well a lot of that will depend upon when the demand comes back in terms of.
So we don't really guide for the year that but that's probably dependent upon.
Revenue coming back to a more normal level.
Let me just add a few points though.
We are.
<unk> levels basically brought them down in <unk>, we're going to bring them down again in <unk>, you see the inventory reduction of $70 million and <unk>, which was a little bit better than I think we guided last quarter.
You can expect that inventory to be reduced at a similar level in <unk> and again in Tokyo.
And what we're also doing now is we're activating our hybrid manufacturing strategy. So we're actually swinging wafers.
External backend house, which moderates the factory load, which which gave us a little bit of a cushion on that gross margin side as well.
So just a little bit more color as what you can expect for first and second quarter here.
Thanks, a lot thanks, Jim and thanks, Chris for the question.
One moment our next question.
Your next question comes from tore Svanberg with Stifel. Your line is open.
Yes, Thank you and congratulations on the results in this tough environment.
I had a question about.
Capex.
So one of your competitors talk about this geopolitical dependable capacity that they're investing in youre going through the complete all the way you're reducing capex a lot for this year help us understand a little bit what your partners are doing your foundry partners are doing for you to sort of feel comfortable that.
You don't have to spend as much in capex going forward. Thank you.
Thanks, Tara if you want me to take that Vince I'll also ask you about sort of some color. Yes. So let me just let me pause and take a take a step back on Capex for a second so at our Investor day, we outlined basically elevated capex.
In the high single digit range for 2022 and 2023.
And then long term that would actually trend back down to mid single digits.
As I said this past year, our Capex was about $1 2 billion on a gross basis, which is about 10% of sales.
Which was a bit higher basically due to the revenue falloff that we saw in the second half of the year.
This year as I said, we're basically slowing our capacity expansion and our capex given kind of the short term demand that we're actually seeing there. So from a capex viewpoint, we're going to expect that to drop by about $500 million.
And our.
FY 'twenty four.
And as I noted this figure doesn't reflect any of the benefit from either the U S or European Chips Act.
From a capacity viewpoint, what does that mean.
That basically means that we'll be able to still double our internal capacity footprint.
By 2025, originally we were thinking that was going to take place more in the 2024 time period, but given the macro and the demand outlook, we're comfortable with that so.
So we don't need basically all of that capacity in the short term.
From a customer viewpoint from a swing capacity viewpoint.
Our goal is to be able to basically swing, 70% of our product portfolio from internal to external fabs.
That's good for our customers because it gives our customers the ability to dual source and that really creates a rich and resilient supply chain.
With multiple options for our customers and then from a gross margin viewpoint entirely.
Allows us.
It's a moderate the factories a bit.
This additional swing come in house as well. So we're we're comfortable with that strategy. Our ventures, yes. So let me add onto that good morning, Tory, Let me add a couple of.
Pieces of color to what Jim was just said so.
Most of <unk> revenue today.
Built on process technologies that are 180 nanometers and above.
Now in digital technology terms.
That's a very very old process technology, that's more than 25 years old in terms of its currency.
But in the analog space you know that is still a very contemporary process node. So.
More than 70.
More than 70% of our revenue today is produced on process technologies that are 180 nanometer and above.
As Jim said.
We've gone through a major internal expansion to give us more flexibility and agility in terms of where and how we manufacture those process technologies.
And.
We are making.
All of these investments that we've made on the internal Fabs are 200 millimeter wafers. So the tool chains are less expensive.
We're able to get tremendous return on investment over many many decades on the investments that we're making so.
And I think.
Below that for the let's say at the final law and geometry nodes, we have very very good alternatives with with our external partners, who are very very really important piece.
Of how we make our the hybrid manufacturing model works so.
Anything that is kind of 19 nanometers and below.
300 millimeter wafers and we secure.
That production.
With multiple sources across the globe.
Very helpful. Thank you.
Thanks, So much Cory and go to our last question. Please.
One moment our last question.
Our last question comes from Timothy Arcuri with UBS. Your line is open.
Thanks, a lot I had a question on <unk>.
Inventory it sounds like Youre planning to bring it down quite a bit from here and you mentioned that the target is 120 days, but of course it depends on what the base of revenue base. So can you quantify how much more you plan to take out of your inventory.
Seems like it could come down maybe a couple of hundred million dollars more from here and then also maybe if you can also quantify and this is kind of a hard question to answer but how much is selling below sell through I know you get some metrics, particularly inside of distribution.
Hey, Timothy let me, let me, let me take that.
Just to be clear, let me, let me color.
We stopped that back what I said, so basically inventory in fourth quarter was down $70 million.
And that was on a quarter on quarter compare that was.
Most all at the finished goods level.
And one Q.
We plan to take inventory down by a similar amount.
And then we will do that again in <unk>. That's on a dollar basis not on a days basis, just just to be clear there. So over the course of three quarters fourth quarter and the first half of 'twenty four we expect inventory to be down in the $200 million plus range.
For that.
In terms of the channel as I mentioned, we are.
Our sell in to the channel is lower than our sell through.
And fourth quarter that was.
It was in the $50 million range and I would probably expect.
Probably a similar number there.
And first quarter.
Yes.
And with that.
Thanks, Jim.
And your question on the days of inventory I would say our pre Covid target was 120 <unk> close to 190 today I think both those numbers are going to be wrong. When all the dust settles, but we'll re up you on kind of the long term inventory days model at a future call and with that okay. Mike. Thanks.
Good Tim.
Thanks, everyone for joining us this morning, a copy of the transcript will be available on our website.
Thank you for joining the call I appreciate your interest in Adi and have a great Thanksgiving.
Concludes today's analog devices conference call you may now disconnect.
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