Q1 2024 Analog Devices Inc Earnings Call
Okay.
Operator: Good morning and welcome to the Analog Devices first quarter fiscal year 2024 earnings conference call, which is being webcast via telephone and over the web. I'd like to now introduce your host for today's call, Mr. Michael Lucarelli, Vice President of Investor Relations and FP&A. Now, the floor is yours.
Speaker Change: Good morning, and welcome to the analog devices first quarter fiscal year 2024 earnings conference call, which is being audio webcast via telephone and over the web.
Speaker Change: Like to now introduce your host for today's call Mr. Michael Lucarelli, Vice President of Investor Relations and F. P. N a sir the floor is yours.
Michael C. Lucarelli: Thank you, Josh. And good morning, everybody. Thanks for joining our first quarter fiscal 2024 conference call. With me on the call today are ADI CEO and Chair Vincent Roche and ADI CFO Rich Puccio. For anyone who missed the release, you can find it and related financial schedules at Investor. Analog.com. Now, disclosures.
Michael C. Lucarelli: Thank you Josh and good morning, everybody. Thanks for joining our first quarter quarter fiscal 'twenty 'twenty four conference call.
Michael Lucarelli: With me on the call today are Adi's, CEO and chair of Vincent Roche Adi's CFO rich puccio.
Speaker Change: For anyone who missed the release you can find it and relating financial schedules at investor analog Dot com.
Speaker Change: On to the disclosures.
Michael C. Lucarelli: The information we're about to discuss includes forward-looking statements which are subject to certain risks and uncertainties, as further described in the earnings release, our periodic reports, and other materials filed with the SEC. Actual results could differ materially from the forward-looking information as these statements reflect our expectations only as of the date of this call. We undertake no obligation to update these statements except as required by law.
Speaker Change: The information we're about to discuss includes forward looking statements, which are subject to certain risks and uncertainties.
Speaker Change: I would describe the earnings release are correct reports and other materials filed with SEC.
Speaker Change: 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.
Michael C. Lucarelli: References to gross margin, operating and non-operating expenses, operating margin, tax rate, EPS, and free cash flow in our comments today. We'll be on a non-GAAP basis to exclude special items. When comparing our results to historical performance, special items are also excluded from prior periods. Reconciliation of these non-GAAP measures, the most directly comparable GAAP measures, and additional information about our non-GAAP measures are included in today'
Speaker Change: Robin just a gross margin operating and nonoperating expenses operating margin tax rate EPS and free cash flow in our comments today will be on a non-GAAP basis, which excludes special items.
Speaker Change: Comparing our results to historical performance special items are also excluded from prior periods reconciliations.
Speaker Change: A reconciliation of these non-GAAP measures.
Speaker Change: It's directly comparable GAAP measures and additional information about our non-GAAP measures are included in today's earnings release as a reminder, the first quarter of 'twenty 'twenty four it was a 14 week quarter.
Michael C. Lucarelli: As a reminder, the first quarter of 2024 was a 14-week quarter. And with that, I'll turn it over to ADI's CEO and Chairperson, Vincent Roche.
Speaker Change: I'll turn it over to Adi's, CEO and Chairman Vincent Roche Vince.
Vincent T. Roche: Thank you very much, Mike, and good morning to you all. But before I begin, I'd like to welcome ADI's new CFO, Richard Puccio, to the call, who is only a few weeks old, but we're very excited to have him on board. He brings tremendous financial experience and capability from complex technology sectors, which I think will be very valuable as we continue to extend our leadership in the Intelligent Edge era. I'd also like to recognize Jim Mollica for serving as interim CFO and thank Jim for his continued partnership and contributions to our success.
Vincent T. Roche: Thank you very much Mike and good morning to you all but before I begin I'd.
Vincent T. Roche: I'd like to welcome Adi's, New CFO, Richard put you to the call.
Richard: Which is only a few weeks in.
Vincent T. Roche: But we're very excited to have him on board.
Vincent T. Roche: He brings tremendous financial experience and capability from complex technology sectors.
Vincent T. Roche: I think it will be very valuable as we continue to extend our leadership in the intelligent edge era.
Vincent T. Roche: I'd also like to recognize Jim Mullen for serving as interim CFO and thank Jim for his continued partnership and contributions to our success.
Vincent T. Roche: Now onto the results for the first quarter. ADI delivered revenue of more than $2.5 billion, operating margins of 42%, and earnings per share of $1.73, all above the midpoint of our. As we previously discussed, the inventory rationalization that our customers began during the middle of 2023 is expected to continue through our second quarter. Encouragingly, first quarter bookings improved sequentially, growing our confidence that inventory-related headwinds will largely subsid That's it.
Vincent T. Roche: Now onto the results for the first quarter Adi delivered revenue of more than $2 5 billion operating margins of 42% and earnings per share of $1 73, all above the midpoint of our outlook.
Vincent T. Roche: As we previously discussed the inventory rationalization that our customers that began during the middle of 'twenty. Two 'twenty three is expected to continue through our second quarter.
Vincent T. Roche: Encouragingly.
Vincent T. Roche: First quarter bookings improved sequentially growing our confidence that inventory related headwinds with largely subside this quarter.
Vincent T. Roche: The macro situation remains challenging, and the shape and timing of a second half recovery will be governed by underlying demand. Importantly, the strength of our balance sheet, operational agility, and prudent capital management are serving us well during this downturn. To that end, we've invested heavily in R&D, customer engagement activity, and manufacturing resilience, fueling our future growth, even as we maintain the industry-leading profitability that supports our practice of robust capital return. I'm pleased to highlight that we announced a 7% dividend increase yesterday, making 2024 the 20th consecutive year of higher dividends for shareholders. Now digging a little deeper into our investment philosophy, we continue to focus on anticipating our customers' future needs in what is becoming a software-defined, AI-driven world leveraging pervasive sensing, edge computing, and ubiquitous connectivity. The technological complexity facing our customers is compounded by their need to deliver solutions that are both secure and extremely power efficient.
Third the.
Vincent T. Roche: The macro situation remains challenging and the shape and timing of a second half recovery will be governed by underlying demand.
Vincent T. Roche: Okay.
Vincent T. Roche: Importantly, the strength of our balance sheet operational agility and prudent capital management are serving us well during this downturn.
Vincent T. Roche: We've invested heavily in R&D customer engagement activity and manufacturing resiliency.
Vincent T. Roche: During our future growth, even as we maintain the industry leading profitability.
Vincent T. Roche: Ports, our practice of robust capital returns.
Vincent T. Roche: To that end.
Vincent T. Roche: I'm pleased to highlight that we announced a 7% dividend increase yesterday.
Vincent T. Roche: Making 2020 for the 20 <unk> consecutive year of higher dividends for shareholders.
Vincent T. Roche: Now digging a little deeper into our investment philosophy, we continue to focus on anticipating our customers' future needs in what's becoming a software defined.
Vincent T. Roche: AI driven world leveraging pervasive sensing.
Vincent T. Roche: Computing and ubiquitous connectivity.
Vincent T. Roche: The technological complexity facing our customers is compounded by their need to deliver solutions that are both secure and extremely power efficient.
Vincent T. Roche: So let me share a little more now about how we are strategically allocating our capital to deliver more solutions value to our customers and further support their confidence in long-term supply assurance. Since our acquisition of Maxim, we've increased our engineering population by around 10%, complementing our world-class analog talent with increasing levels of digital, software, AI, and systems expertise. This breadth of engineering gives ADI the capabilities to tackle more of our customers' challenges and grow our SAM across markets. In addition, as our engineers increasingly work shoulder to shoulder with our customers to co-architect their solutions, we further deepen our understanding of their technological and market challenges. This strengthens our ability to deliver increasingly stronger innovation from components. Physical Edge System.
Vincent T. Roche: So let me share a little more now about how we are strategically allocating our capital to deliver more solutions value to our customers and further support their confidence in the long term supply assurance.
Vincent T. Roche: Since our acquisition of Maxim, we've increased our engineering population by around 10% complementing our world class analog talents with increasing levels of digital software AI and systems expertise.
Vincent T. Roche: This breadth of engineering gives adi the capabilities to tackle more of our customers' challenges and grow our son across markets.
Vincent T. Roche: In addition, as our engineers increasingly work shoulder to shoulder with our customers to co architect their solutions, we further deepened our understanding of their technological and market complexities.
Vincent T. Roche: This strengthens our ability to deliver increasingly stronger innovation from components to physical edge systems.
Vincent T. Roche: And I'd like to share now a few examples of what I mean. For example, in the industrial sector. Digital transformation is driving investment in edge-based connectivity and control platforms that enable secure, power-efficient monitoring and control of automation systems. Last month, Honeywell announced it will use ADI's deterministic Ethernet and software-configurable I-O solution across its factory automation and building management. ADI's portfolio enables customers to securely deliver end-to-end signal integrity between the edge and the cloud in a power-efficient and highly flexible platform configuration.
Speaker Change: And I'd like to share a few examples of what I mean.
For example in the industrial sector.
Speaker Change: Digital transformation is driving investment in edge based connectivity and control platforms.
Speaker Change: That enables secure power efficient monitoring and control of automation systems.
Speaker Change: Last month.
Speaker Change: Anyone announced it will use Adi as deterministic Ethernet and software Configurable <unk> solutions.
Speaker Change: Across their factory automation and building management offerings.
Speaker Change: Our portfolio enables customers to securely deliver end to end signal integrity between the edge and the cloud and a power efficient and highly flexible platform configuration.
Vincent T. Roche: The system approach enables us to capture three times more value, and we expect additional design wins due to high customer interest globally. In the automotive sector, we've aligned our business to the secular trends of electrification, advanced safety systems, and the Immersive Digital In-Cabin Experience. For example, our Gigabit Multimedia Serial Link, or GMSL, solution continues to gain broader adoption as customers seek to extend high-performance data and video capabilities across their fleets. We recently increased our share as a top three global auto manufacturer, extending our position across all their brands and quintupling our GMSL opportunity at that customer. In data centers, AI and machine learning computing systems require orders of magnitude more processing and, thus, energy compared to traditional workloads.
Speaker Change: Our system approach enables us to capture three times more value and we expect additional design wins due to high customer interest globally.
Speaker Change: In the automotive sector, we've aligned our business to the secular trends of electrification advanced safety systems and immersive digital in cabin experience.
Speaker Change: For example, our gigabit multimedia serial link our <unk> solution continues to gain broader adoption as customers seek to extend high performance data and video capabilities across their fleets.
Speaker Change: We recently increased our share.
Speaker Change: Top three global auto manufacturer, extending our position across all of their brands and quintuplex or <unk> opportunity at that customer.
Speaker Change: In data centers.
Speaker Change: And machine learning computing systems require orders of magnitude more processing, and thus energy compared to traditional workloads.
Vincent T. Roche: Our portfolio of high-performance power and protection solutions specifically designed for vertical power delivery is helping customers re-architect their data center system to improve power delivery and system performance. Last quarter, we secured a significant design win from a large, hyperscale customer for our multi-phase vertical power solution that reduces power losses by 35% when compared to conventional, and Healthcare This market continues to digitalize to enable more predictive and preventative treatment regimens. ADI has been on the forefront of this transition, and I'm pleased to let you know that we recently received FDA clearance for a non-invasive remote monitoring platform that enables home-based management of chronic diseases such as congestive heart failure. This solution leverages our deep domain expertise, leading-edge capabilities across signal processing and sensor modality, and unique algorithms that enable medical providers to act early, precisely, and effectively.
Speaker Change: Our portfolio of high performance power and protection solutions.
Speaker Change: Specifically designed for vertical power delivery is helping customers re architect their data center systems to improve power delivery and system performance.
Speaker Change: Last quarter, we secured a significant design win from a large hyperscale customer for our multi phase vertical power solution that reduces power losses by 35% when compared to conventional ones.
Speaker Change: In health care.
Speaker Change: This market continues to digitalize to enable more predictive and preventative treatment regimens.
Speaker Change: Adi has been on the forefront of this transition and I'm pleased to let you know that we've recently received FDA clearance for our noninvasive remote monitoring platform that.
Speaker Change: That enables home based management of chronic diseases, such as congestive heart failure.
This solution Leverages, our deep domain expertise, leading edge capabilities across signal processing and sensor modalities and unique algorithms that enabled medical providers to act early precisely and effectively.
Vincent T. Roche: As a platform, this also allows us, in the future, to use our data-driven AI algorithms to make this even more personalized. This advance unlocks a new growth vector for ADI, adding more than $5 billion of new revenue. Switching now to the evolution of our supply chain, I'd like to share some of our progress in manufacturing resilience, which is a growing priority for our customers. Over the last two years... we've invested record levels of CAPEX to expand our capacity and enhance our resilience. Now with line of sight to achieving our goal of doubling front and back end internal capacity in 2025, we will begin to significantly reduce our capital spend. Notably, approximately 10% of our investments have been focused on implementing more efficient systems that will deliver sustainability benefits, including greatly reducing input resources and emissions, which over time will also lower our operating costs.
Speaker Change: As a platform. This also allows us in the future to use our data driven AI algorithms to make this even more personalized.
Speaker Change: This advanced unlocks a new growth vector for Adi, adding more than $5 billion of new Sun.
Speaker Change: Switching now to the evolution of our supply chain I'd like to share some of our progress in manufacturing resilience, which is a growing priority for our customers.
Speaker Change: Over the last two years.
Speaker Change: <unk> invested record levels of capex to expand our capacity and to enhance resiliency.
Speaker Change: Now with line of sight to achieving our goal of doubling front and backend internal capacity in 2025 will.
Speaker Change: We will begin to significantly reduce our capital spend notably approximately 10% of our investments have been focused on implementing more efficient systems.
Speaker Change: We'll deliver sustainability benefits, including greatly reducing input resources and emissions, which over time will also lower our operating costs.
Vincent T. Roche: These investments enable a more flexible hybrid manufacturing model and will increase our swing capacity to around 70% of revenue in the coming year. This unique ability helps to capture the upside in strong demand backdrops and better protect our gross margins during more challenging times. Complementing these organic investments, we also expanded our foundry partnership with TSMC to secure additional 300 millimeter fine pitch technology capacity at their Japan subsidiary.
Speaker Change: These investments enable a more flexible hybrid manufacturing model and will increase our swing capacity to around 70% of revenue in the coming years.
Speaker Change: This unique ability helps to capture the upside and strong demand backdrops and better protect our gross margins during more challenging times.
Speaker Change: Complementing these organic investments.
Speaker Change: We also expanded our foundry partnership with TSMC.
Speaker Change: To secure additional 300 millimeter fine pitch technology capacity after Japan subsidiary.
Vincent T. Roche: Our investments, combined with the support of our foundry partners, will enable us to manufacture our products in multiple geographic locations, enhancing our resiliency and giving our customers greater optionality and assurance over their supply chain. So, in closing, as always, we're keeping one eye on the present and one eye on the future. I have confidence in the steps that we're taking to preserve our capital and navigate the near-term challenges while ensuring that we make the necessary investments to increase our competitiveness and accelerate our business in the future. And so, with that, I'd like to pass the microphone over to Richard.
Our investments combined with the support of our foundry partners will enable us to manufacture our products in multiple geographic locations enhancing our resiliency.
Speaker Change: And giving our customers greater optionality and assurance over their supply chains.
Speaker Change: So in closing as always we're keeping one eye on the presence and one eye on the future.
Speaker Change: I have confidence in the steps that we're taking to preserve our capital.
Speaker Change: Forget the near term challenges, while ensuring that we make the necessary investments to increase our competitiveness and accelerate our business in the future.
Speaker Change: So with that I'd like to pass the microphone over to rich.
Richard Puccio: Thank you, Vince. And let me add my welcome to our first quarter earnings call. I'm excited to have joined ADI and look forward to helping the company navigate the near term while ensuring we're well positioned to capitalize on the tremendous opportunities ahead of us. Despite continued challenging business conditions, ADI achieved first quarter revenue that was slightly above the midpoint of our outlook, or down 8% sequentially and 23% year over year. Industrial represented 48% of revenue in the quarter, down 12% sequentially and 31% year-over-year. As expected, we experienced fraud-based weakness as customers continue to work down their inventory levels. Automotive, which represented 29% of revenue, was up 2% sequentially and 9% versus the year-ago period, representing 14 consecutive quarters of growth. Notably, our leading connectivity and functionally safe power solutions collectively increased double digits year over year. Communications, which represented 12% of revenue, declined 10% sequentially and 37% year over year.
Richard Sewell: Thank you Vince and let me add my welcome to our first quarter earnings call I'm excited to have joined Adi and look forward to helping the company navigate the near term, while ensuring we are well positioned to capitalize on the tremendous opportunities out of us.
Richard Sewell: Despite continued challenging business conditions, we achieved first quarter revenue, which was slightly above the midpoint of our outlook are down 8% sequentially and 23% year over year.
Richard Sewell: Industrial represented 48% of revenue in the quarter down, 12% sequentially and 31% year over year.
Richard Sewell: As expected, we experienced broad based weakness as customers continue to work down their inventory levels Automd.
Richard Sewell: Automotive, which represented 29% of revenue was up 2% sequentially and 9% versus the year ago period, representing 14 consecutive quarters of growth notably.
Richard Sewell: Our leading connectivity and functionally safe power solutions collectively increased double digits year over year.
Communications, which represented 12% of revenue declined 10% sequentially and 37% year over year on a sequential basis wireline fared relatively well driven by AI related demand, while wireless decreased as global investments in five G remained depressed.
Richard Puccio: On a sequential basis, wireline fared relatively well, driven by AI-related demand, while wireless decreased as global investments in 5G remained depressed. And lastly, consumers represented 11% of revenue, down 7% sequentially, and 22% year-over-year, driven by continued sluggish end demand across applications. Now on to the rest of the P&L. First quarter gross margin was 69%, down sequentially and year over year, driven by an unfavorable mix, lower revenue, and lower utilization. OPEX in the quarter was $679 million, down 2% sequentially, despite the extra week, driven by lower variable comp, disciplined discretionary spend, and structural cost improvement. As a result, operating margin of 42% finished near the high end of our output. Non-operating expenses finished at $75 million, and the tax rate for the quarter was 11.8%.
Richard Sewell: And lastly, consumer represented 11% of revenue down, 7% sequentially and 22% year over year, driven by continued sluggish and demand across applications.
Richard Sewell: Now on to the rest of the P&L.
Richard Sewell: First quarter gross margin was 69% down sequentially and year over year, driven by unfavorable mix lower revenue and lower utilization.
Opex in the quarter was $679 million down 2% sequentially. Despite the extra week, driven by lower variable comp disciplined discretionary spend and structural cost improvement as a result operating margin of 42% finished near the high end of our outlook.
Richard Sewell: Non operating expenses finished at $75 million and the tax rate for the quarter was 11, 8%.
Richard Sewell: All told EPS was $1 73 slightly above the guided midpoint.
Speaker Change: Now onto the balance sheet.
Speaker Change: Cash and equivalents increased more than $340 million sequentially and ended the quarter at $1 3 billion, our net leverage ratio remained below one.
Speaker Change: Inventory decreased nearly $90 million sequentially, driven primarily by finished goods while days increased to 201 due to lower revenue.
Speaker Change: Channel inventory dollars declined again in <unk> with weeks of inventory, finishing slightly above our target range of 7% to eight weeks.
Speaker Change: Moving on to cash flow items over the trailing 12 months operating cash flow and Capex were $4 6 billion and $1 3 billion respectively.
Richard Puccio: All told, EPS was $1.73, slightly above the guided mid-price. Now on to the balance sheet. Cash and Equivalents increased more than $340 million sequentially and ended the quarter at $1.3 billion. Our net leverage ratio remained below 1.
Speaker Change: We continue to expect fiscal 2020 for Capex to be approximately $700 million. As a reminder, these are gross capex figures are not including any of the anticipated benefits from both the U S and European chips acts.
Speaker Change: Over the last 12 months, we generated $3 2 billion of free cash flow or 28% of revenue. During the same time period, we have returned more than $4 2 billion through dividends and share repurchases.
Richard Puccio: Inventory decreased nearly $90 million sequentially, driven primarily by finished goods, while days increased to 201 due to lower revenue. Channel inventory dollars declined again in one cue, with weeks of inventory finishing slightly above our target range of 7-8 weeks. Moving on to cash flow items, over the trailing 12 months, operating cash flow and CapEx were $4.6 billion and $1.3 billion, respectively. We continue to expect fiscal 2024 CapEx to be approximately $700 million.
Speaker Change: And since our Maxim acquisition, we have returned nearly $12 billion or more than 130% of free cash flow to shareholders, reducing share count by 8%, while also increasing our dividend per share by 33%, including our most recently announced 7% increase as a reminder, we target 100% free cash flow returned over the <unk>.
Speaker Change: Long term, we aim to use 40% to 60% to grow our dividend annually with the remaining free cash flow used for share count reduction.
Speaker Change: Now moving onto guidance.
Speaker Change: Second quarter revenue is expected to be $2 1 billion, plus or minus $100 million. Once again, we expect sell through to be higher than sell it.
Richard Puccio: As a reminder, these are gross CapEx figures, not including any of the anticipated benefits from both the U.S. and European CHIPS Act. Over the last 12 months, we generated $3.2 billion of free cash flow, or 28% of revenue. During the same time period, we have returned more than $4.2 billion through dividends and share repurchases. And since our maximum acquisition, we have returned nearly $12 billion, or more than 130% of free cash flow to shareholders, reducing the share count by 8% while also increasing our dividend per share by 33%, including our most recently announced 7% increase. As a reminder, we target 100% free cash flow return over the long term. We aim to use 40% to 60% to grow our dividend annually, with the remaining free cash flow used for share count reduction. Now moving on to guidance, second quarter revenue is expected to be $2.1 billion, plus or minus $100 million.
Speaker Change: At the midpoint, we expect all end markets to decline sequentially with the largest decline in industrial as we continue to meaningfully reduce channel inventory.
Speaker Change: Operating margin is expected to be 37% plus or minus 100 basis points. This includes the impact of unfavorable mix and lower utilization as we further reduce balance sheet inventory.
Speaker Change: Our tax rate is expected to be 11% to 13% and on based on these inputs EPS is expected to be $1 26, plus or minus 10 sets.
Speaker Change: In closing the actions we've taken to protect profitability in the near term as well as the natural sharp shock absorbers embedding Adi have enabled us to maintain strong profitability, even as our quarterly revenue has fallen significantly from its peak importantly, with the strength of our finance financial profile and the growing importance of our technology we will.
Speaker Change: Turning to invest confidently in our future regardless of where we are in the cycle.
Speaker Change: I will now give it back to Mike for Q&A.
Mike: Thanks, Rich and welcome to the call now, let's get to our Q&A session.
Mike: All right yourself to one question in order to offer additional participants on the call. This morning.
Richard Puccio: Once again, we expect sell-through to be higher than sell-in. At the midpoint, we expect all end markets to decline sequentially, with the largest decline in industrial as we continue to meaningfully reduce channel inventory. Operating margin is expected to be 37%, plus or minus 100 basis points. This includes the impact of unfavorable mix and lower utilization as we further reduce balance sheet inventory. Our tax rate is expected to be 11% to 13%, and based on these inputs, EPS is expected to be $1.26, plus or minus 10 cents.
Follow up question. Please re queue and we'll take your question. If time allows with that we have our first question. Please.
Speaker Change: Thank you for.
Speaker Change: For those participating by telephone dial in if you have a question. Please press star one one on your phone to enter the queue. If your question has been answered and you wish to be removed from the queue. Please press the star one one keys again, if you are listening on a speakerphone. Please pick up the handset when asking your question, we'll pause for just a moment to compile the Q&A.
Speaker Change: Sir.
Speaker Change: Okay.
Speaker Change: Our first question comes from Joseph Moore with Morgan Stanley You May proceed.
Joseph Moore: Great. Thank you.
Joseph Moore: Can you say you guys are guiding down now.
Joseph Moore: With 30% year on year.
Richard Puccio: And in closing, the actions we've taken to protect profitability in the near term, as well as the natural shock absorbers embedded in ADI, have enabled us to maintain strong profitability even as our quarterly revenue has fallen significantly from its. Importantly, with the strength of our financial profile and the growing importance of our technology, we will continue to invest confidently in our future, regardless of where we are in the cycle. I will now give it back to Mike for Q&A. Thanks, Rich, and welcome to the call. Let's get to our Q&A session. I ask that you limit yourself to one question in order to allow for additional participants on the call this morning.
Joseph Moore: If I go back to historic Drawdowns, you haven't seen revenue fall that bar other than 2001, 2009, where we had kind of a significant demand destruction. So okay.
Joseph Moore: And it looks like the worst inventory correction, maybe we've ever seen can you just talk to that is that does that reflect how much inventory excess there might have been or just any kind of sense Jack as we approach the bottom as to as to why the downturn it looks kind of severe.
Jack: Yeah, Thanks, John I think first and foremost.
Joseph Moore: Sure.
If you like.
Speaker Change: <unk> events that caused.
Jack: The supply chain fracture was unique.
Jack: And every single segment was impacted every single customer every single business.
Jack: So this is truly the broadest base <unk>.
Michael C. Lucarelli: If you have a follow-up question, please recur, and we'll take your question if time allows. With that, we have our first question, please. Thank you. For those participating by telephone dial-in, if you have a question, please press star 1-1 on your phone to enter the queue. If your question has been answered and you wish to be removed from the queue, please press the star 1-1 keys again.
Jack: Demand inflection I've ever seen in my.
Speaker Change: 30, something years with Adi and I've been through all of those different.
Speaker Change: All of those different perturbations, so I think that's the.
The uniqueness of the event itself.
Speaker Change: I think as.
Speaker Change: Is what caused the level of impact.
Speaker Change: You know if everything compounded we sold the supply chain fracture than we saw it we saw the shortage.
Operator: If you are listening on a speakerphone, please pick up the handset when asking your question. We'll pause for just a moment to compile the Q&A. Our first question comes from Joseph Moore with Morgan Stanley. You may proceed. Great, thank you.
Speaker Change: And then we got the behavior that we typically see in a shortage situation you've got double ordering you got holding.
Speaker Change: <unk>.
Speaker Change: Where we're seeing that everywhere.
Vincent T. Roche: To the extent, I mean, you guys are guiding down now, mid-30% year on year. If I go back to historic drawdowns, you haven't seen revenue fall that far other than 2001-2009, where we had kind of significant demand destruction. So, it kind of looks like the worst inventory correction maybe we've ever seen. Can you just talk about that?
Speaker Change: The area that we've probably seen I would say the biggest correction is in the industrial market and I think.
Speaker Change: Our sensors.
Speaker Change: That it.
Speaker Change: It began in the second.
Speaker Change: The second half of the past year.
Speaker Change: And that will take four to five quarters to correct I believe from the.
Speaker Change: <unk>.
Speaker Change: The beginning of the decline to when we start to see growth again, so I think that's pretty much it but now we're in a situation where the lead times of our uniform and actually.
Vincent T. Roche: Does that reflect how much inventory excess there might have been or just any kind of, you know, sense check as we approach the bottom as to why the downturn looks kind of severe? Yeah, thanks, Joel. I think first and foremost, the, if you like, the event that calls attention to the supply chain fracture was unique.
Speaker Change: <unk> got ahead of the.
Speaker Change: The supply chain issues, I think faster than most.
Speaker Change: Got our lead times back into better shape than most quite quickly.
Speaker Change: So we saw the we saw the downturn I think more quickly than others.
Vincent T. Roche: And every single segment was impacted, every single customer, every single business. So this is truly the broadest base of man's inflection I've ever seen in my 30-something years with ADI. And I've been through all those different perturbations. So I think that's the uniqueness of the event itself, I think, is what caused the level of impact.
Speaker Change: So.
Speaker Change: And all of that said, Joe I think.
Speaker Change: The underlying demand for our products and technologies in the years ahead, we remain very very bullish about that.
Speaker Change: And I expect as we've indicated that we will see a return back to.
Vincent T. Roche: And, you know, everything compounded. We saw the supply chain fracture, then we saw the shortage. And then we got the behavior that we typically see in a shortage situation: you get double ordering, you get hoarding. And, you know, we're seeing that everywhere.
Speaker Change: Growth in the second half of our fiscal year.
Joe: Thanks, Joe Gorder next question please.
Speaker Change: Thank you.
Speaker Change: One moment for questions.
Speaker Change: Our next question comes from Stacy <unk> with Bernstein Research you May proceed.
Hi, guys. Thanks for taking my question.
Stacy: Richard I was wondering if you could give us a little more color on the segment guidance into next quarter. I know you said everything down in industrial worse, but I mean.
Vincent T. Roche: The area that we've probably seen, I would say, the biggest correction is in the industrial market, and I think our sense is that it began in the second half of the past year, and it will take four to five quarters to correct, I believe, from the beginning of the decline to when we start to see growth again. So I think that's pretty much it. But now we're in a situation where the lead times are very uniform. And actually, we got ahead of them.
Stacy: Industrial has got to be down probably more than 20% sequentially and that would probably still assume everything else is down double digits sequentially is that what you have in mind.
Richard Sewell: And any further color you could give us would be it would be great.
Richard Sewell: Yeah, I'll grab that one it's Mike. So you are right to think industrial is the weakest.
Mike: I'd say, 20% sequentially sharing you can put that number in your model. If you want to be 20% plus or minus sequentially. I would say comms is also probably worse than the midpoint of our guidance are down more than the 16% on a guy to auto.
Vincent T. Roche: You know, supply chain issues, I think, faster than most. We got our lead times back into better shape than most quite quickly, and so we saw the downturn, I think, more quickly than others. So, you know, all that said, Joe, I think the underlying demand for our products and technologies in the years ahead will remain very, very bullish about that. And I expect, as we've indicated, that we'll see a return to growth in the second half of our fiscal year. Thanks, Joe.
Mike: Auto and consumer probably do a bit better by our bulk down pretty significantly sequentially as well and really the big driver on the industrial piece of Ed we laid out as the channel reduction.
Mike: For the inventory in the channel, which is impacting industrial marshal in our other markets.
Mike: Okay.
Speaker Change: Thank you I hope to help Stacy we will go next question.
Speaker Change: Thank you one moment for questions.
Speaker Change: Our next question comes from Chris Danley with Citi. You May proceed.
Christopher Brett Danely: Hey, Thanks, guys just to follow up on that question.
Christopher Brett Danely: How much of this downturn do you think is just pure inventory correction versus demand and then any any comments you could.
Christopher Brett Danely: You could have on just demand trends as far as what you're hearing from the distribution channel and your customers.
Speaker Change: Yes, sure I'll start and then I think just to add some clarity also on it but this really is a supply driven demand correction, what youre seeing here and Vince outlined out and answer the first question, where the supply chain fracture lead times extended for an extended period of time those are normalized or silly seeing what are happening is our customers as they build that inventory over.
Vincent T. Roche: Go to the next question, please. Thank you. One moment for questions. Our next question comes from Stacy Rasgon with Bernstein Research. You may proceed. Hi guys.
Michael C. Lucarelli: Thanks for taking my question. Um, Rich, I was wondering if you could give us a little more color on the segment guides for the next quarter. I know you said everything down in industrial works, but I mean, like, industrial's got to be down probably more than 20% sequentially, and that would probably still assume everything else is down double digits sequentially. Is that what you have in mind? and Any further color you could give us would be great.
Speaker Change: That time why early time for an extremely long now or at least had a back to normal or seeing them reduced our balance sheet inventory to match, our short lead times. So the cycle times match up so really ashab met majority supply chain.
Speaker Change: Some demand in some areas or pockets of weakness in demand, but really overall I'll call. It more of a supply and demand correction in our business and we talked about in the <unk>.
Script, and as well as the press release that supplied normalizing here in our second quarter.
Speaker Change: Yes, I think Chris if we.
Speaker Change: Look at the two halves of FY 'twenty four I believe the first half is all about inventory indigestion of digestion and as Mike said, we largely get through that part of the of the headwinds.
Michael C. Lucarelli: Sure, yeah, I'll grab that one. It's Mike. So you're right to think industrial is the weakest. I would say 20% sequentially, sure, you can put that number in your model if you want to, 20% plus or minus sequentially. I would say communications is also probably worse at the midpoint where it got in, so down more than the 16% we got into, while auto and consumer probably do a bit better, but they are both down pretty significantly sequentially as well. And really, the big driver on the industrial piece, as we laid out, is the channel reduction for the inventory and the channel, which is impacting industrial more so than other markets. I hope that helps Stacy.
Speaker Change: By the end of our second quarter and then in the second half.
Speaker Change: All the indications are bookings are getting stronger cancellations rebating or conversations with customers suggest that will begin to return to a growth pattern in the second half a big question is the macroeconomic dial.
Speaker Change: Sure.
Speaker Change: Whether thats positions.
Speaker Change: Sure.
Speaker Change: And.
Speaker Change: I think that the margins if I look at where we are this quarter versus last quarter at least from a macro standpoint, maybe with the exception of China, where more bullish than we were.
Speaker Change: Yes.
Alright, thanks, guys.
Speaker Change: Thanks, Chris Thank you.
Speaker Change: One moment for questions.
Speaker Change: Our next question comes from Vivek Arya with Bank of America Securities You May proceed.
Michael C. Lucarelli: We'll go to our next question. Thank you. One moment for questions. Our next question comes from Chris Danely with Citi. You may proceed. Yeah, sure. I'll start, and then I think Vince will also add some clarity to it.
Vivek Arya: Thanks for taking my question Vince on the last earnings call you mentioned bookings of stabilizing I think this quarter youre, saying bookings are improving.
Vivek Arya: And Im curious, which end markets are showing the best recovery in bookings and then importantly, how should this inform us about what Adi will see as we get into.
Michael C. Lucarelli: But this really is a supply-driven demand correction, what you're seeing here. And Vince outlined that in the answer to the first question, where the supply chain fracture lead times extended for an extended period of time. Those have normalized, and we're still seeing what our customers are doing is they build a lot of inventory over that time. Why?
Vivek Arya: The July quarter should we be assuming some kind of seasonal.
Vivek Arya: The recovery should we assume things flatten out first and if I could.
Vincent T. Roche: Our lead times were extremely long. Now, our lead times are back to normal, so you're seeing them reduce their balance sheet inventory to match our short lead times, so the cycle times match up. So really, that's a majority supply chain. Some areas of pockets of weakness in demand, but really overall, I'll call it more of a supply than demand correction in our business. Script and as well as the press release that supplies are normalizing here in our second quarter. Yeah, I think Chris, if we look at the two halves of FY24. I believe the first half is all about inventory, indigestion, and digestion.
Vivek Arya: That's kind of part B of that which is what happens to gross margins as you start to see that flattening out and potentially the company. So just the shape of what recovery looks like in sales and margin.
Vivek Arya: <unk> flattened and now they seem to be improving.
Vivek Arya: Yes, well I think look assuming the demand in flex.
Vivek Arya: We got back into a more normalized growth pattern vivek everything will improve.
Vivek Arya: Our utilization and improve.
Vivek Arya: We have under shifts the channel we've under shipped to our customers. So we've been working very very hard in the company to make sure that when demand and flex that we will get a.
Vincent T. Roche: And as Mike said, we largely get through that part of the headwind by the end of our second quarter. And then in the second half, you know, all the indications are that bookings are getting stronger, cancellations are abating, and our conversations with customers suggest that we begin to return to a growth pattern in the second half. The big question is the macroeconomic dial, you know, where that's positioned, and I think at the margins, if I look at where we are this quarter versus last quarter, at least from a macro standpoint, maybe with the exception of China, we're more bullish than we were. Thanks, Chris.
Vivek Arya: We've got the supply in place we've got lots of finished goods and Diestock inventory. So we're in a great position.
Vivek Arya: To address the recovery.
Vivek Arya: On the first part of your question about where are we seeing the bookings improvement pretty much everywhere pretty much everywhere.
Vivek Arya: Across all of the segments.
Vivek Arya: If you look at industrial I would say the two healthiest parts of industrial REIT knows we.
Vivek Arya: <unk>.
Vivek Arya: As we messaged to the external world Aerospace and defense and healthcare.
Vivek Arya: They've got fundamentally quite different drivers to say the factory automation or instrumentation business.
Vincent T. Roche: Thank you. One moment for questions. Our next question comes from Vivek Arya with Bank of America Securities. You may proceed.
Vivek Arya: But.
Vivek Arya: Those two sectors are holding up better than the rest.
Vivek Arya: But even in a more traditional industrial sector like instrumentation all of these new.
Vincent T. Roche: Thanks for taking my question. Vince, on the last earnings call, you mentioned bookings are stabilizing. I think this quarter you're saying bookings are improving. And I'm curious, which end markets are showing the best recovery in bookings? And then, importantly, how should this inform us about what ADI will see as we get into the July quarter? Should we be assuming some kind of seasonal recovery? Should we assume things flatten out first?
Vivek Arya: High performance computing systems need.
Vivek Arya: <unk> test equipment, so that benefits Adi.
Vivek Arya: So I think in general it's true to say, maybe with the exception of our wireless business. Most sectors are seeing a return to a more normalized.
Vivek Arya: Bookings pattern.
Vivek Arya: Okay.
Speaker Change: Yes, Andrew.
Andrew: I'll give you a little more color on the gross margin outlook.
Andrew: So in the last call, we talked about gross margin would be 68% to 69%. We came in at the high end. Good result, given the large drop in industrial that we've been talking about and with an inventory takedown of almost $90 million quarter over quarter or.
Vincent T. Roche: And if I could attach part B of that, which is what happens to gross margins as you start to see that flattening out and potential recovery, so just the shape of what recovery looks like in sales and margins if bookings flattened and now they seem to be improving. Yeah, well, I think as soon as demand inflects, and we, you know, we get back into a more normalized growth pattern, Vivek, everything will improve. You know, we have undershipped the channel, we've undershipped our customers.
<unk> outlook implies, 67% plus or minus a bit lower than where we thought we'd be given the weaker revenue, especially in industrial and the fact that we're taking down factory starts further in <unk> to reduce inventory by another $50 million to $100 million.
Andrew: And if I think a little bit further out to the <unk>.
Andrew: Two outlook.
Andrew: Tough to predict right now as the revenue and.
Vincent T. Roche: So we've been working very, very hard in the company to make sure that when demand inflects, we will get a We've got the supply in place, we've got lots of finished goods and die stock inventory, so we're in a great position to address the recovery. On the first part of your question about, you know, where are we seeing the bookings improvements? Pretty much everywhere, pretty much everywhere across all the segments, and if you look at industrial, I'd say the two healthiest parts of industrial right now are us, as we message to the external world. Aerospace and defense, healthcare.
Andrew: And the shape of the revenue recovery will be the governor on gross margin trajectory, but our best sense is gross margin trends higher in the second half as you don't see utilization going much lower as inventory continues to decline meaningfully at these start levels and will continue to leverage our swing capacity.
Speaker Change: And with that because you asked a three part question I'll chime in as well for our third quarter outlook I knew you gave me the.
Speaker Change: Outlook, although question so.
Speaker Change: It's hard to say our lead times are 13 weeks are lower so we don't really have visibility into the third quarter today, but if you look back over our history over the past decade, our BTB markets are about flattish sequentially in <unk> from <unk>, sometimes dropped a little bit sometimes they're down a little bit depending where you are in the cycle, while consumers start seeing some holiday builds kind of up mid.
Speaker Change: High single digits sequentially. So that's kind of historical context, we're not guiding the third quarter, but that is how would you frame. It and then to add on to what Vince said about bookings because they have to increase last quarter and the court before that so <unk> had won't your bookings both improved and what's interesting now is look at our bookings are approaching parity, which is a good sign that we should see a pickup in the back half of the year.
Vincent T. Roche: You know, they've got fundamentally quite different drivers for, say, the factory automation or instrumentation business. But, you know, those two sectors are holding up better than the rest. But even in a more traditional industrial sector like instrumentation. All of these new high-performance computing systems need... You test equipment.
Speaker Change: Very helpful. Thank you.
Speaker Change: Thank you.
Speaker Change: One moment for questions.
Vincent T. Roche: So that benefits ADI. So I think, in general, it's true to say, maybe with the exception of our wireless business, most sectors are seeing a return to a more normalized booking pattern. And Vivek, I'll give you a little more color on the gross margin outlook. So in the last call, you know, we talked about gross margin being 68 to 69 percent. We came in at the high end, a good result given the large drop in industrial that we've been talking about and with an inventory takedown of almost $90 million quarter over quarter.
Harlan Sur: Our next question comes from Harlan sur with Jpmorgan you May proceed.
Harlan Sur: Hi, Good morning, Thanks for taking my question. So if I look at fiscal 'twenty three China was about 18% of the total revenues and it was the worst performing geography down about 13% for the full year.
Harlan Sur: Because there was so late this year it feels like just to add a little bit of uncertainty at the beginning of this year, but obviously in our post lunar new year, what are the demand signs out of this region are orders also growing sequentially in the China regions. Our cancellations also showing signs of stabilization pattern is.
Richard Puccio: The 2Q outlook implies 67%, plus or minus, a bit lower than where we thought we'd be given the week of revenue, especially in industrial, and the fact that we're taking down factory starts further in 2Q to reduce inventory by another $50 to $100 million. And if I, you know, think a little bit further out to the half-two outlook, tough to predict right now as revenue and the shape of the revenue recovery will be the governor on gross margin trajectory, but our best sense is gross margin trends higher in the second half, as we don't see utilization going much lower, as inventory continues to decline meaningfully at these start levels and will continue to leverage our swing capacity. And Vivek, because you asked a three-part question, I'll chime in as well on the third quarter outlook. I knew you'd give me the outlook, the outlook question. So it's hard to say, right?
Harlan Sur: Well maybe even.
Harlan Sur: Signs of a potential pickup in the China region, just wanted to get your views.
Speaker Change: Yes, sure. So if you take a step back for a Geo perspective, all regions are weak North America, Europe, China, Chasmin weakest the longest I would say on the rest of Asia is doing better than the big three but still weak as well.
Speaker Change: And like I said, China is the weakest source of demand around Chinese new year honestly, if there's something unique about it we call it out but I think we'll have been set and the last question basically was.
Speaker Change: Bookings are improving globally.
Speaker Change: As well as in China beforehand, Appetizing area, So really no impact from Chinese new year and kind of the commentary we've made.
Speaker Change: Perfect. Thank you.
Speaker Change: Thank you.
Speaker Change: One moment for questions.
Speaker Change: Our next question comes from Toshi Hari with Goldman Sachs. You May proceed.
Toshiya Hari: Hi, good morning. Thanks, so much for taking the question Vince I'm curious, how you would characterize sell through today versus sell in.
Michael C. Lucarelli: Our lead times are 13 weeks or lower, so we don't really have visibility into the third quarter today. But if you look back over our history, over the past decade, our B2B markets have been about flattish, sequentially in 3Q from 2Q. Sometimes they're up a little bit, sometimes they're down a little bit, depending where you are in the cycle. While consumers start seeing some holiday build kind of up sequentially from mid to high single digits, so that's kind of the historical context.
Toshiya Hari: I think at a conference a couple of months ago, you had mentioned that sell in was tracking 15% to 20% below sell through is that still the right ballpark number and is that what youre seeing in the current quarter.
Toshiya Hari: If so if the end demand.
Toshiya Hari: Environment doesn't deteriorate over the next six nine months could there be a quarter later in the year, where your revenue run rate is tracking above 252 6 billion. Thank you.
Speaker Change: Sure I'll grab the first part of that on the sell in and sell through part of it tells you. So sell in sell through really relates to the channel we reduced our channel inventory dollars the past two quarters out.
Michael C. Lucarelli: We're not guiding the third quarter, but that's how you should frame it. And then, to add to what Vin said about bookings, bookings actually increased last quarter and the quarter before that. So 4Q and 1Q bookings both improved. And what's interesting now, if you look at our bookings, they're approaching parity, which is a good sign that we should see a pickup in the back half of the year. There you have it. Thank you.
Speaker Change: I'll call around a 50 million reduction plus or minus per quarter over the last two quarters looking at embedded in our guidance is a much bigger reduction of channel inventory. If you want to put a number around $100 million or so in our outlook, that's probably what you're seeing on the channel side are reducing a lot in the channel now as you look to the back half of the year from a channel perspective, we think the selling and sell through should be better.
<unk> given the actions we've taken over the last three quarters and I'll pass it events popular about the customer inventory situation at the end customer side.
Michael C. Lucarelli: One moment for questions. Our next question comes from Harlan Sur with J.P. Morgan. Hi, good morning.
Events Popular: Yeah on the on the customer side of things.
Michael C. Lucarelli: Thanks for taking my question. So, if I look at fiscal 23, China was about 18% of your total revenues. It was the worst performing geography, down about 13% for the full year.
Speaker Change: Monitoring very very carefully across the various segments.
Speaker Change: Our customer shipment rates their inventories.
Speaker Change: And their AVR goods on hand.
Speaker Change: Were clearly under shipping.
Speaker Change: Our customers.
Speaker Change: Current demands so we feel that we've got a situation now in terms of we're in a good inventory position on hand.
Michael C. Lucarelli: Because the Lunar New Year was so late this year, it feels like this did add a little bit of uncertainty at the beginning of this year, but obviously, now we're post-Lunar New Year. What are the demand signs out of this region? Are orders also growing sequentially in the Chinese regions? Are cancellations also showing signs of stabilization patterns as well? Maybe even signs of a potential pickup in the Chinese region? Just want to get your views.
Speaker Change: Our customers are beginning as Mike indicated to replenish there.
Speaker Change: Their order books Adi's goods.
That gives us the confidence as the book to Bill approaches unity.
Speaker Change: We've seen the worst of the.
Michael C. Lucarelli: Yeah, sure. So if you take a step back, from a geopolitical perspective, all regions are weak. North America, Europe, China. China's been the weakest the longest, I would say.
Speaker Change: Of the inventory correction.
Speaker Change: Second half, we will get back to a more normalized growth pattern and so as Mike said, there's very good balance between.
Speaker Change: The direct channel the distribution channel.
Michael C. Lucarelli: The rest of Asia is doing better than the Big Three, but still weak as well. And like I said, China is the weakest source of demand. Around Chinese New Year, honestly, if there's something unique about it, we call it out.
Speaker Change: In terms of the inventory situation, but.
Speaker Change: We're ready for the upsurge.
Speaker Change: Great. Thank you.
Speaker Change: Thank you.
Speaker Change: One moment for questions.
Speaker Change: Our next question comes from William Stein with True Securities You May proceed.
William Stein: Great. Thanks for taking my questions I want to welcome rich, but direct a couple of questions to Vince Please.
Michael C. Lucarelli: But I think what Vincent said in the last question basically was, bookies are improving globally, as well as in China before and after Chinese New Year, so really, there is really no impact from Chinese New Year on the kind of commentary we've made. Perfect, thank you. Thank you. One moment for questions. Our next question comes from Toshiya Hari at Goldman Sachs. Sure, I'll grab the first part of that on the sell-in and sell-through part of it, Toshi. So sell-in and sell-through really relate to the channel. We have reduced our channel inventory dollars the past two quarters. I would call it around a $50 million reduction, plus or minus, per quarter over the last two quarters.
William Stein: Yes.
William Stein: The more vertical capabilities that you talked about.
William Stein: It sort of suggests that you're.
William Stein: Youre needing to either partner more closely with a smaller number of customers or maybe you want to get cushing somewhat into their capabilities.
William Stein: Potentially competing with some of them and I Wonder how you contemplate managing that dynamic.
William Stein: Yes.
Speaker Change: Thanks, very much you are on.
Speaker Change: Unfortunately, the line chopped I think I got your question about virtualization competing with our customers potentially.
Speaker Change: Hopefully you can hear me, okay that it's not a two airline problem here.
Speaker Change: Well look.
Speaker Change: We've been on a journey over many many years know too.
Michael C. Lucarelli: Looking at it embedded in our guidance is a much bigger reduction in channel inventory. If you want to put a number around $100 million or so in our outlook, that's probably what we're seeing on the channel side. So we're reducing a lot in the channel.
Speaker Change: Continue to build out our core component franchise, but also add more value to our.
Speaker Change: Two our solutions our business has become more solutions oriented, particularly over the last decade in every single segment that we play.
Vincent T. Roche: Now, as you look at the back half of the year, from a channel perspective, we think the sell-in and sell-through should be a better match, given the action we've taken over the last three quarters. And I'll pass it to Vince to talk really about the customer inventory situation and the end customer side. Yeah, on the customer side of things, you know, we've been monitoring very, very carefully across the various segments, our customers' shipment rates, their inventories, and their ADI goods on hand, and we're clearly under shipping, our customers' current demands. So we feel that we've got a situation now in terms of our, we're in a good inventory position on hand. Our customers are beginning, as Mike indicated, to replenish their order books with ADI's goods.
Speaker Change: And.
Speaker Change: You know that that kind of.
Speaker Change: Domain application driven engineering that Adi has been distinguishing so at the edge over the last decade that will continue and will continue to build that.
Speaker Change: On the in the prepared remarks about this.
Speaker Change: Yeah.
Speaker Change: <unk>.
Speaker Change: At this point of care acute healthcare solution that we've just brought to market, where we've gotten FDA approval.
Speaker Change: I think what's happening well in the in the World is that there are certain places like that where we have a quite spoke to attack. We're building a complete solution that has both hardware and software mix a lot of sense.
Speaker Change: But the truth is even in the traditional markets.
Vincent T. Roche: That gives us confidence as the book approaches unity that, you know, we've seen the worst of The Inventory Correction, and in the second half, we'll get back to a more normalized growth pattern. So as Mike said, there's a very good balance between, I don't have the direct channel, the distribution channel, in terms of the inventory situation, but we're ready for the upswing. Great, thank you.
Speaker Change: With the with the larger customers that we deal with more and more.
Speaker Change: Footprint capture if you like has been taking place quite because we <unk> our customers complexity and I've talked before about the asymmetry in capabilities in the analog space between the capabilities Adi has gotten our customers who've got they expect this actually to add more solution value.
Vincent T. Roche: Thank you. One moment for questions. Our next question comes from William Stein with Truist Securities. You may... Great. Thanks for taking my questions. I want to welcome Rich, but I want to direct a couple questions to Vince, please.
Speaker Change: <unk>.
Speaker Change: Build more complete solutions and clearly define where the line is between where there.
Speaker Change: Core value is versus where adi's for value. So.
Vincent T. Roche: Vince, given the more vertical capabilities that you talked about, it sort of suggests that you're needing to either partner more closely with a smaller number of customers, or maybe you want to start pushing somewhat into their capabilities and are, you know, potentially competing with some of them. And I wonder how you contemplate managing that dynamic. Yeah, well, thanks very much. Unfortunately, you're unfortunately the line that was cut.
Speaker Change: Yes.
Speaker Change: I think we're not competing with our customers, but we have very vibrant discussions about where we draw the line of the labor device so to speak.
Speaker Change: That helps if I can ask a follow up.
Speaker Change: You talked a bit about AI.
Speaker Change: Sort of a familiar topic.
Speaker Change: Yes.
Maybe.
Speaker Change: Maybe too much though but.
Speaker Change: Right.
Speaker Change: There is there is that.
Speaker Change: Narrative here, where there are some.
Vincent T. Roche: I think I understand your question about verticalization, competing with our customers potentially. Hopefully, you can hear me okay, that it's not a two-way line problem here. Well, look, we've been on a journey over many, many years now to continue to build out our core component franchise but also add more value to our solutions. Our business has become more solution-oriented, particularly over the last decade in every single segment that we play. And, you know, that kind of domain application-driven engineering that ADI has been distinguishing itself at the edge over the last decade. That will continue, and we'll continue to build on that. I talked in my prepared remarks about this, this point of care acute health care solution that we've just brought to market, where we've gotten FDA approval.
Speaker Change: Creative capabilities in fact, I would say engineering focused capabilities that may be.
Speaker Change: Made more efficient or productive with Cherokee AI and.
Speaker Change: In a world where.
Speaker Change: The story about analog design engineer capability being so limited and that driving a significant advantage for Adi I Wonder if that story changes at all because of this capability have you started using this or circuit design or do you anticipate that it could be used.
Speaker Change: Bye bye, others, either competitors or customers. Thank you.
Speaker Change: Yes, it's a good question well look everybody is trying to figure out the meaning of the AI in their businesses, we're using AI today.
Speaker Change: And our tool chains, we're using machine learning and AI and our products around our products, we are starting to use it in our business.
Vincent T. Roche: I think what's happening in the world is that there are certain places like that where we have a white space to attack, where building a complete solution that has both hardware and software makes a lot of sense. But the truth is, even in traditional markets and with the larger customers that we deal with, more and more footprint capture, if you like, has been taking place. Why?
Speaker Change: And I think any but I believe that anything that can be anything that is routine.
Speaker Change: And that can be automated.
Speaker Change: It's the way of technology technology automation will take take over the things that are more routine.
Speaker Change: Play very much at the at the high end of the performance spectrum. So.
Vincent T. Roche: Because we tame our customers' complexity, and I've talked before about the asymmetry and capabilities in the analog space between the capabilities ADI has got and those our customers have got. They expect us, actually, to add more solution value and build, you know... build more complete solutions and clearly define where the line is between where their core value is versus where ADI's core value is. You know, I think we're not competing with our customers, but we have very vibrant discussions about where we draw the line on the labor divide, so to speak. That helps.
Speaker Change: So unless there is generally sort of intelligence.
Speaker Change: Outperform auto imaginations, which I don't see any time.
Speaker Change: In the foreseeable future.
Speaker Change: We are truly in a realm, where the intellectual property value in the learning system that we've got in this company will not heard more and more but.
Speaker Change: Yes, I think we view AI as a tremendous opportunity.
Speaker Change: Clearly in the product development process from.
Speaker Change: How the products are designed what we put.
Speaker Change: As ingredients in our products.
Speaker Change: And we're also by the way putting AI into the customer support to change. So it is a part.
Vincent T. Roche: If I can ask a follow-up question. You talked a bit about AI. It's sort of a familiar topic to us lately.
Speaker Change: We're embracing it and we believe that it will be an accelerator.
Vincent T. Roche: Maybe, maybe too much so, but there's a narrative here where there are some, I would say, engineering-focused capabilities that may be made more efficient or productive with generative AI. In a world where the story about analog design engineer capability being so limited and that driving a significant advantage for ADI, I wonder if that story changes at all because of this capability. Have you started using this for circuit design, or do you anticipate that it could be used by others, either competitors or customers? Thank you. Yeah, it's a good question.
Speaker Change: And on the co pilots, if you like with our engineering population.
Speaker Change: Thank you.
Speaker Change: Thanks, well and it sounds like from your cell phone line would you need some more <unk> coverage.
Speaker Change: That next question please.
Speaker Change: Thank you one moment for questions.
Speaker Change: Our next question comes from Timothy Arcuri with UBS you May proceed.
Timothy Michael Arcuri: Hi, Thanks, a lot can you talk to any.
Timothy Michael Arcuri: Period costs versus Underutilization charges that you are taking.
Timothy Michael Arcuri: And any of those how much of a headwind are those now and how much will that help you as they might reverse themselves coming out of the downturn.
Vincent T. Roche: Well, look, everybody's trying to figure out the meaning of AI in their businesses. We're using AI today in our tool chain. We're using machine learning and AI in our products, and around our products. We're starting to use it in our business. And I think any, I believe that anything that can be, anything that is routine, and that can be automated, that's the way of technology. Technology automation will take over the things that are more routine. We play very much at the high end of the performance spectrum. So unless there's a generative intelligence that can outperform our imaginations, which I don't see any time, you know, in the foreseeable future, we're truly in a realm where the intellectual property value and the learning system that we've got in this company will matter more and more, but yeah, I think we view AI as a tremendous opportunity. You know, clearly in the product development process from, you know, how the products are designed, and what we put as ingredients in our products.
Timothy Michael Arcuri: So I think your question is on how much of the impact on our gross margin Underutilization versus mix I think if you look here.
Timothy Michael Arcuri: Our peak gross margin, we're about 74%.
Timothy Michael Arcuri: We our outlook as rich pointed out embeds about 67% that decline is really mix.
Timothy Michael Arcuri: And our utilization of about equal parts I'll call. It as you look to the back half of this year. It depends what mix is going to do.
Timothy Michael Arcuri: I think industrials bottoming here, so that should help a little bit from utilization standpoint, rich also pointed out our starts are low enough to reduce inventory meaningfully.
Timothy Michael Arcuri: We've been doing that we'll do it again in <unk>. So <unk> starts going down their prices are going up which should provide a tailwind to gross margins how fast the gross margins pick up really depends on those two factors, how fast revenue picks up and how much of it relates to the industrial sector.
Timothy Michael Arcuri: Okay, Mike, but I guess are there any inventory charges thats the question.
Mike: So for the inventory, yes, I would say good question, you're right. We have a lot inventory as you can see on our balance sheet.
Speaker Change: There is no acceleration of inventory charges in our gross margins.
Speaker Change: Their inventory charged from reserve standpoint have been elevated for the past few quarters, they probably stay that way as you go into back half of this year into next year, but that's not a headwind anymore. It's already kind of built in the run rate.
Vincent T. Roche: And we're also, by the way, putting AI into the customer support tool chain. So, it is a part, we're embracing it, and we believe that it will be an accelerator and a co-pilot, if you like, with our engineering public. Thank you. Thanks, Will. It sounds like from your cell phone line that we need some more 5G coverage.
Speaker Change: Okay awesome. Thanks, Mike.
Speaker Change: Thank you. Thanks, Tim we'll go to our last question. Please.
Speaker Change: One moment for our last question.
Speaker Change: And our last question comes from C. J Muse with Cantor Fitzgerald you May proceed.
Speaker Change: Yes. Thank you for taking the question you talked about auto being down sequentially, but but seeing I guess the best performance out of all the different segments curious if you can kind of walk through what youre seeing from.
Michael C. Lucarelli: Next question, please. Thank you. One moment for questions. Our next question comes from Timothy Arcuri with UBS. Hi, thanks a lot.
Speaker Change: From tier one auto correction and whether you think.
Michael C. Lucarelli: Can you talk about any period costs versus underutilization charges that you're taking? And any of those, you know, how much of a headwind are those now? And how much will those help you as they might reverse themselves coming out of this? So I think your question is how much of the impact on gross margins is underutilization versus mix. I think if you look here... Our peak gross margins were about 74%. Our outlook, as Richard pointed out, embeds about 67%. That decline is really mixed, and our utilization, about equal parts, I'll call it. As you look to the back half of this year, it depends on what Mix is gonna do.
Speaker Change: That will be completed exiting April as well thanks, so much.
Speaker Change: Yes, I heard from the auto standpoint C. J I would say, yes, there is definitely inventory correction going on in auto like all our mark as Vince pointed out the supply fracture hit everyone is to a lesser degree than auto than other markets, but it's not really because of inventories because of the growth drivers in that business, whether it's BMS <unk> functional safe power the growth in those areas.
Speaker Change: Our offsetting the overall call it inventory digestion in automotive area Youre right to say that on the tier one side or the OEM side Theres, some frothy inventory, but we're seeing that being digested will it be all complete by.
Speaker Change: By the second quarter, we'll see but I do feel good about those growth areas continue to grow this year and for the full year will auto auto grow I don't know well see but it really depends on how strong the growth is in the growth areas and how much of the overhang on inventory side as but net net we do feel good about auto being our best performing end market here in <unk>.
Michael C. Lucarelli: I think industrial is bottoming here, so that should help a little bit. From a utilization standpoint, Rich also pointed out, our starts are low enough to reduce inventory meaningfully. We've been doing that, and we'll do it again in 2Q. So I don't see starts going down; they'll probably start going up, which should provide a tailwind to gross margins. How fast gross margins pick up really depends on those two factors, how fast revenue picks up, and how much of it relates to the industrial sector. Okay, Mike, but I guess there are any inventory charges? Oh, so for inventories, yes, I would say, good question, you're right, we have a lot of inventory, as you can see on our balance sheet. But then, there's no acceleration of inventory charges in our gross margins. Their inventory charges from a reserve standpoint have been elevated for the past few quarters, and they probably will stay that way as you go into the back half of this year into next year. But that's not a headwind anymore.
Speaker Change: And for the full year 'twenty four.
Speaker Change: Alright, Thank you C J and thanks, everyone for joining our call. This morning, a copy of the transcript will be available on our website.
Speaker Change: Thanks for joining us and have a great rest of the day.
Speaker Change: Thank you. This concludes today's analog devices conference call you may now disconnect.
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Michael C. Lucarelli: It's already kind of built into the run rate. Chaos, thank you. Thanks, Tim. We'll go to our last question, please. One moment for our last question. And our last question comes from CJ Muse with Cantor Fitzgerald. Yeah, thank you for taking the question.
Michael C. Lucarelli: You talked about the auto being down sequentially, but but seeing, I guess, the best performance out of all the different segments. Curious if you can kind of walk through what you're seeing from tier one auto correction and whether you think that will be completed by exiting April as well. Thanks so much. Yeah, sure. From the auto standpoint, CJ, I would say, yeah, there is definitely an inventory correction going on in the auto industry, like all our markets. Vince pointed that out.
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Michael C. Lucarelli: The supply fracture hit everyone. It's to a lesser degree than the auto industry than other markets, but it's not really because of the inventory. It's because of the growth drivers in that business, whether it's BMS, GMSL, A to B, and functional safe power. The growth in those areas is offsetting the overall inventory digestion and the automotive industry. You're right to say that on the Tier 1 side or the OEM side, there's some frothy inventory, but we're seeing that being digested. Will it be all complete? By the second quarter, we'll see, but I do feel good about those growth areas continuing to grow this year. And for the full year, will auto grow? I don't know. We'll see. But it really depends on how strong the growth is in the growth areas and how much of the overhang on the inventory side is.
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Michael C. Lucarelli: But net-net, we do feel good about the auto industry being our best-performing end market here in 2Q and for the full year of 2024. All right. Thank you, CJ. And thanks, everyone, for joining our call this morning. A copy of the transcript will be available on the website.
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Operator: Thanks for joining us, and have a great rest of the day. Thank you. This concludes today's Analog Devices conference call. You may now disconnect. www.microsoft.com www.mooji.org Thank you for watching.