Q2 2024 Analog Devices Inc Earnings Call
Operator: I'd now like to introduce your host for today's call, Mr. Michael Lucarelli, Vice President of Investor Relations and FP&A. Sir, the floor is yours.
I'd now like to introduce your host for today's call.
Speaker Change: Mr. Michael Lucarelli, Vice President of Investor Relations and S. P N a sir the floor is yours.
Michael C. Lucarelli: Thank you, Gigi, and good morning, everybody. Thanks for joining us on the call today. 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 www.investor.analog.com under the Disclosures section.
Speaker Change: Thank you Judy and good morning, everybody. Thanks for joining our second quarter of fiscal 2024 conference call.
Speaker Change: With me on the call there 80, Ico and chair of Vincent Roche Adi's CFO rich puccio.
Speaker Change: But he wanted who missed the release you can find it.
Speaker Change: Perhaps a scheduled an investor day, and a lot of dot com.
Michael C. Lucarelli: The information we are about to discuss includes forward-looking statements, which are subject to certain risks and uncertainties as previously described in Ernie's release and our peer-reviewed 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 at the date of this call. We undertake no obligation to update the statements except as required by law. References to gross margin, operating and non-operating expenses, operating margin, tax rate, EPS, and free cash flow in our comments today will be on a non-GAAP basis.
Speaker Change: The disclosures information we're about to discuss includes forward looking statements, which are subject to certain restaurant certainties as further described in earnings release Andrew.
Speaker Change: And up here I can report and other materials filed with SEC.
Actual results could differ materially from the forward looking information and that these statements reflect our expectations only as the date of this call.
Speaker Change: That'll take no obligation to update these statements except as required by law.
References to gross margin operating and nonoperating expenses operating margin tax rate EPS and free cash flow and our comments today will be on a non-GAAP basis, which excludes special items.
Michael C. Lucarelli: Excludes Special Items, In comparing our results to our historical performance, special items are also excluded from prior periods. Reconciliation of these non-GAAP measures to the most directly comparable GAAP measures and additional information about our non-GAAP measures are included in today's release. And with that, I'll turn it over to ADI CEO and Chair, Vince
Speaker Change: When comparing our results of our historical performance special items are also excluded from prior periods.
Speaker Change: Conciliation of these non-GAAP measures to the most directly comparable GAAP measures and additional information about our non-GAAP measures are included in today's release.
Speaker Change: With that I'll turn it over to Adi see armchair Vince.
Vincent T. Roche: Thanks very much, Mike. Good morning, and a big welcome to you all.
Mike: It's very much Mike good morning, and a big welcome to you all so in the second quarter, a strong focus on execution resulted in revenue of $2.16 billion with profitability and earnings per share, finishing above the high end of our outlook.
Vincent T. Roche: So in the second quarter, a strong focus on execution resulted in revenue of $2.16 billion, with profitability and earnings per share finishing above the high end of our outlook. With 2Q now behind us, we believe we've passed the low point of this cycle. Notably, global manufacturing PMIs, which are highly correlated with our core business, are improving, and customer inventories are stabilizing. And our bookings have improved for a third consecutive quarter. Our growing optimism remains guarded, however, as short-term economic and geopolitical uncertainty persists.
Mike: With two qunar behind US we believe we've passed the low point of the cycle.
Mike: Notably global manufacturing Pmi's, which are highly correlated with our core business are improving.
Mike: Customer inventories are stabilizing.
And our bookings have improved for a third consecutive quarter.
Mike: Our growing optimism remains guarded however.
Mike: Short term economic and geopolitical uncertainty persists as such we will continue to manage the near term with great discipline as.
Vincent T. Roche: As such, we will continue to manage the near term with great discipline as we fund and execute against our longer-term strategic priorities to drive increasing levels of value for all of our stakeholders. So with that in mind, I'd like to share some examples with you of how we are continuing to strengthen ADI's high-performance franchise across all markets and creating unique growth drivers that will be additive to what we hope will be a strong cyclical recovery.
Mike: As we fund and execute against our longer term strategic priorities to drive increasing levels of value for all of our stakeholders.
Mike: So with that framing I'd like to share. Some examples with you of how we are continuing to strengthen ati's high performance franchise across all markets and creating unique growth drivers that will be additive to what we hope will be a strong cyclical recovery.
Vincent T. Roche: For example, in healthcare, we have exciting wins in areas such as the rapidly expanding surgical robotics market, where the performance of our precision signal processing and connectivity solutions is critical. And in the fast-growing continuous glucose monitoring space, we've won multiple opportunities across several customers. Our unique digitally-enabled analog front-end solutions increase the accuracy and power efficiency of sensors and extend battery life from days to weeks.
Mike: For example in health care, who are exciting wins in areas such as the rapidly expanding surgical robotics market or the performance of our precision signal processing and connectivity solutions is critical.
Mike: And in the fast growing continuous glucose monitoring space, we've won multiple opportunities across several customers.
Mike: Our unique digitally enabled analog front end solutions increase the accuracy and power efficiency of sensors and <unk>.
Mike: <unk> battery life from days to weeks.
Vincent T. Roche: In industrial automation, the growth of the digital factory is accelerating upgrades to higher bandwidth, deterministic industrial Ethernet that can support up to 10 times the number of edge devices across the factory floor. We believe our leadership position with key customers will create a durable revenue stream beginning next year that can grow to several hundreds of millions of dollars as deployments ramp over time. Turning to the automotive domain, our solid performance is being driven by the proliferation of higher content vehicles that use more power management, more connectivity, and an increasing number of sensor platforms that open new signal processing opportunities for ADI.
Mike: In industrial automation.
Mike: Most of the digital factory is accelerating upgrades to higher bandwidth deterministic industrial Ethernet.
Mike: That can support up to 10 times the number of edge devices across the factory floor. We believe our leadership position with key customers will create a durable revenue stream beginning next year.
Mike: That can grow to several hundreds of millions of dollars as deployments ramp overtime.
Mike: Turning to automotive our solid performance is being driven by the proliferation of higher content vehicles.
Mike: That use more power management more connectivity and an increasing number of sensor platforms that open new signal processing opportunities for Adi.
Vincent T. Roche: The increasing content per vehicle is a pervasive trend across all vehicle types, and Boston Engines, Hybrids, and Full EVs, for example, in advanced safety. We've increased our GMSL design wins from 12 to 15 of the top 20 OEMs, and expanded our engagements at two European and one Korean OEMs who intend to deploy our high-performance, high-bandwidth connectivity solution across a larger share of their fleet.
The increase in content per vehicle is a pervasive trend across all vehicle types combustion engines hybrids and full evs.
Mike: For example in advanced safety.
Mike: We've increased our GM ESL design wins from 12 to 15 of the top 20 Oems.
Mike: And expanded our engagements are two European and one Korean OEM, who intend to deploy our high performance.
Mike: High bandwidth connectivity solution across a larger share of their fleets.
Vincent T. Roche: We've also seen strong demand for a functionally safe power, which is used with sensors and displays in ADAS systems, and recently increased our chair at the leading global car manufacturer. In electrification, we've expanded our battery management system share at leading Chinese OEMs and more than doubled our BMS share in upcoming European OEM model launchers, and two manufacturers intend to deploy our higher content wireless solutions starting next year. I'd like to use the rest of my prepared comments today to share our perspective on the role that artificial intelligence is playing and will play at ADI in the future.
Mike: We've also seen strong attach for functionally safe power, which is used with sensors and displays and Adas systems and recently increased share at a leading global car manufacturer.
Mike: In electrification, we have expanded our battery management system share at leading Chinese Oems and more than doubled our BMS share in upcoming European OEM model launches and two manufacturers' intend to deploy our higher content wireless solutions starting next year.
Mike: Now I'd like to use the rest of my prepared comments today to share our perspective on the role that artificial intelligence is playing and will play at Adi in the future.
Vincent T. Roche: This technology has clearly reached a tipping point, and our AI opportunity spans from sensor to cloud. While we've been adding algorithmic and software intelligence to our products now for decades, we've expanded the scope and pace of our investments in recent years. Today, we are increasingly leveraging AI in and around our products, as well as in our operations, to more fully meet our customers' needs and extend our industry leadership. We're deploying AI internally to help accelerate engineering development, enhance manufacturing efficiency, and create a better customer experience. But the majority of our activities are centered around product portfolio innovations that position us to take advantage of AI's enormous potential. We see this business opportunity coming in two distinct waves.
Mike: This technology has clearly reached a tipping point and our AI opportunity spans from sensor to cloud.
Mike: While we've been adding algorithmic and software intelligence to our products now for decades, we've expanded the scope and pace of our investments in recent years.
Mike: Today, we are increasingly leveraging AI in and around our products as well as in our operations to more fully meet our customers' needs and extend our industry leadership.
We're deploying AI internally to help accelerate engineering development enhancement of fracturing efficiency and create a better customer experience.
Mike: The majority of our activities are centered around product portfolio innovations that position us to take advantage of AI has enormous potential.
Speaker Change: Uh huh.
Speaker Change: We see this business opportunity coming in two distinct waves. The first wave focused on infrastructure is now underway and as we all know is growing very rapidly.
Vincent T. Roche: The first wave, focused on infrastructure, is now underway, and as we all know, is growing very rapidly. In order to tackle the intensified energy and processing demands of AI compute systems, data center customers are investing in new vertical power architectures. As we highlighted previously, our vertical power technology, which can reduce power losses by up to 35% compared to existing architectures, is gaining traction with HyperSkater. We continue to leverage our heterogeneous integration expertise to create more efficient, smaller vertical power solutions that deliver more value and enable us to capture more share in this nascent space.
In order to tackle the intensified energy and processing demands of AI compute systems datacenter customers are investing in new vertical power architectures.
As we highlighted previously our vertical power technology, which can reduce power losses by up to 35% compared to existing architectures.
Speaker Change: Is gaining traction with hyperscale.
Speaker Change: We continue to leverage our heterogeneous integration expertise to create more efficient smaller vertical power solutions that deliver more value.
Speaker Change: It enabled us to capture more share in this nascent space.
Vincent T. Roche: Power-efficient computing, though, is just one challenge the AI ecosystem faces. Data must also be transported efficiently, securely, and at much, much greater speed. This is driving wireline customers to upgrade connectivity infrastructure, sparking a transition to 800 gigabit and 1.6 terabit optical modules. At the Electro-Optical Interface, our ability to provide high-performance solutions that integrate analog, digital, and memory in a reduced form factor is indeed a key different
Speaker Change: Power efficient computing, though is just one challenge the AI ecosystem faces.
Speaker Change: Data must also be transported efficiently securely and at much much greater speeds.
Speaker Change: This is driving wireline customers to upgrade connectivity infrastructure, sparking a transition to 800 gigabit and one six terabyte optical modules.
Speaker Change: At the electro optical interface, our ability to provide high performance solutions that integrate analog digital and memory and a reduced form factor is indeed, a key differentiator.
Vincent T. Roche: Our high-precision controller was recently designed into a 1.6 terabit optical module used in the next-gen AI systems of the high-performance compute leader. In industry, AI is fueling extraordinary demand for high bandwidth memory and high-performance compute. This, in turn, is driving a new growth vector for our instrumentation and test business, particularly in SoC and memory. We're working with key players globally to enable faster digital scan speeds, higher channel density, and the improved energy efficiency necessary for Scale Production of AI Systems.
Speaker Change: Our high precision controller was recently designed into a 1.6 terabyte optical module used in the Nexgen AI systems of the high performance compute leader.
Speaker Change: And industrial <unk>.
Speaker Change: Fueling extraordinary demand for high bandwidth memory and high performance compute this in turn is.
Speaker Change: Is driving a new growth vector for our instrumentation and test business, particularly in Soc and memory test.
Speaker Change: We are working with key players globally.
Speaker Change: To enable faster digital scan speeds higher channel density and the improved energy efficiency necessary to scale production of AI systems.
Vincent T. Roche: The significantly greater amount of ADI content in these systems is positioning our high-performance compute and memory test sectors for record revenues in the near-to-mid-terms. The opportunity ahead for ADI is to compound the impact of this first wave by bringing application-specific AI models and high-performance compute right down to the physical edge. Creating greater system value with added improvements in latency, power efficiency, security, and cost. So, let me share some examples of how we are working to amplify this second wave. For example, an acoustic system.
Speaker Change: The significantly greater amount of Adi content in these systems is positioning our high performance compute and memory test sectors for record revenues in the near to mid term.
Speaker Change: The opportunity ahead for Adi is to compound the impact of this first wave by bringing application specific AI models.
Speaker Change: Models and high performance compute right down to the physical edge.
Speaker Change: Creating greater system value with added improvements in latency power efficiency security and cost.
Speaker Change: So let me share some examples of how we are working to amplify this second wave.
Speaker Change: For example in acoustic systems.
Vincent T. Roche: We are combining our application-specific algorithms with ultra-low-energy processing hardware to enrich our audio platform. We're also developing a mixed signal processor with embedded neural networks that enable a system to learn and adapt to the highly variable nature of sound in real time. Excitingly, we have strong traction with multiple customers in this area. Now, in the same vein, we're leveraging our rich domain expertise with our growing processing capability. To enhance our advanced connectivity platform,
Speaker Change: We are combining our application specific algorithms with ultra low energy processing hardware to enrich our audio platform offerings.
Speaker Change: We're also developing a mixed signal processor with embedded neural networks that enable a system to learn and adapt to the highly variable nature of sound in real time.
Speaker Change: Excitingly, we have strong traction with multiple customers in this area.
Speaker Change: Now in the same vein, we're leveraging our rich domain expertise with our growing processing capabilities to enhance our advanced connectivity platform.
Vincent T. Roche: In next-generation 5G radios, for example, we've implemented the first AI-enabled technology, Combining an energy-efficient real-time neural network with an AI-assisted development tool. We give customers the ability to solve their linearization challenges in a fraction of the time with our Power Management Platform. We're using AI to address the arduous challenge of tuning power trees for volatile consumption patterns in data centers. Our solutions reduce complexity for power engineers and compress the time required from weeks to hours, helping to lower costs and, of course, accelerate time to market.
Speaker Change: And next generation <unk> radios for example, we've implemented the first AI enabled technology.
Speaker Change: Combining an energy efficient real time neural network with an AI assisted development tool to.
Speaker Change: To give customers the ability to solve their linearization challenges and a fraction of the time.
Speaker Change: And our power management platform.
Speaker Change: We're using AI to address the <unk> challenge of tuning powertrain.
Speaker Change: For volatile consumption patterns and data centers.
Speaker Change: Our solutions reduce complexity for power engineers and compressed the time required from weeks to hours, helping to lower costs and of course accelerating time to market.
Vincent T. Roche: The ADI is always operated at the physical edge, where the world's most important real data is born. As multimodal AI becomes more pervasive at the edge, and a diversity of sensor types is used to unearth deeper insights, we expect to see an explosion of demand that will accelerate growth for our broad signal chain as well as power portfolio. In short, ADI's AI future looks bright across the continuum of sensor to cloud.
Speaker Change: The Adi has always operated at the physical edge, where the world's most important real data is born.
Speaker Change: As multimodal AI becomes more pervasive at the edge.
Speaker Change: And the diversity of sensor types is used to on Earth deeper insights.
Speaker Change: We expect to see an explosion of demand that will accelerate growth for our broad signal chain as well as power portfolios.
Speaker Change: In short Adi's AI future looks bright across the continuum sensor to cloud.
Vincent T. Roche: So in closing, I'm very proud of how our team has performed in one of the largest downturns the semiconductor industry has seen. But more importantly, I've never been more excited about how we're positioned for the future and what it holds for ADM. And so with that, I'm going to hand it over to Richard.
Speaker Change: So in closing I'm very proud of how our team has executed in one of the largest downturns the semiconductor industry has seen.
Speaker Change: More importantly, I've never been more excited about how we're positioned for the future and what it holds for Adi.
And so with that I'm going to hand, it over to rich.
Richard C. Puccio: Thank you, Vince. And let me add my welcome to our second quarter earnings call. As a reminder, our first quarter of 2024 was a 14-week quarter, so we are going to limit our comparisons this quarter to year-over-year only. Second quarter revenue of $2.16 billion finished above the midpoint of our outlook. This result was down 34% year over year. Industrial represented 47% of revenue in the quarter and was down 44% year over year. As expected, all applications were impacted by inventory digestion.
Rich: Thank you Vince and let me add my welcome to our second quarter earnings call. As a reminder, our first quarter 2024 was a 14 week quarter. So we are going to limit our comparisons this quarter to year over year only.
Speaker Change: Second quarter revenue of $2 $1 6 billion finished above the midpoint of our outlook. This result was down 34% year over year.
Speaker Change: Industrial represented 47% of revenue in the quarter and was down 44% year over year as expected all applications were impacted by inventory digestion, However, aerospace and defense revenues outperformed broader industrial.
Richard C. Puccio: However, aerospace and defense revenues outperformed broader industrial. Automotive represented 30% of revenue and was down 10% year-over-year. However, continued growth in our leading connectivity and functionally safe power franchises balances broad-based declines elsewhere.
Speaker Change: Automotive represented 30% of revenue and was down 10% year over year.
Continued growth in our leading connectivity and functionally safe power franchises balanced broad based declines elsewhere.
Richard C. Puccio: Communications represented 11% of revenue and was down 45% year-over-year. Inventory digestion and weaker demand impacted both our wireline and wireless business. And lastly, consumer represented 11% of revenue and was down 9% year over year with growth in portables, partially offsetting declines across other applications.
Speaker Change: Communications represented 11% of revenue and was down 45% year over year inventory digestion and weaker demand impacted both our wireline and wireless businesses.
And lastly, consumer represented 11% of revenue and was down 9% year over year with growth in portables, partially offsetting declines across other applications.
Richard C. Puccio: Now let's move from the top line to the rest of the P&L. Second quarter gross margin was 66.7%, down sequentially and year over year, driven by unfavorable mix, lower revenue, and lower utilization as we continue to reduce inventory. Operating expenses in the quarter were $598 million, down significantly year-over-year, driven by lower variable compensation and strong organization-wide execution on cost control. Operating margin of 39% exceeded the high end of our output. Non-operating expenses finished at $64 million, and the tax rate for the quarter was 10.6%.
Speaker Change: Now, let's move from the top line to the rest of the P&L.
Speaker Change: Second quarter gross margin was 66, 7% down sequentially and year over year, driven by unfavorable mix lower revenue and lower utilization as we continue to reduce inventory.
Speaker Change: Operating expenses in the quarter were $598 million down significantly year over year, driven by lower variable compensation and strong organization wide execution on cost control.
Speaker Change: Operating margin of 39% exceeded the high end of our outlook.
Speaker Change: Non operating expenses finished at $64 million and a tax rate for the quarter was 10, 6%.
Richard C. Puccio: The net result was EPS of $1.40, above the high end of our estimates. Our financial position is solid, and I'd like to call out a few items from our balance sheet and cash flow statement. We ended Q2 with more than $2.3 billion of cash and short-term investments and a net leverage ratio of 1.1. During the quarter, we raised $1.1 billion of debt for general corporate purposes, including upcoming debt maturity. Inventory decreased $74 million sequentially, and days declined to 192 from 201.
Speaker Change: The net result was EPS of $1 40 above the high end of our outlook.
Speaker Change: Our financial position is solid and I'd like to call out a few items from our balance sheet and cash flow statement.
Speaker Change: We ended Q2 with more than $2 3 billion of cash and short term investments and a net leverage ratio of one one.
Speaker Change: During the quarter, we raised $1 1 billion of debt for general corporate purposes, including upcoming debt maturities.
Inventory decreased $74 million sequentially and days declined to 192 from 201 as planned we reduced channel inventory this quarter with weeks ending at approximately eight.
Richard C. Puccio: As planned, we reduced channel inventory this quarter with weeks ending at approximately 8. Operating cash flow for the quarter and trailing 12 months was $0.8 billion and $4.3 billion, respectively. CapEx for the quarter and trailing 12 months was $188 million and $1.2 billion, respectively. We continue to expect fiscal 24 CAPEX to be roughly $700 million, which is a reduction of approximately 45% versus 2023 as our hybrid manufacturing investment cycle taper. Not included in these figures are benefits from both the European and U.S. CHIPS Act.
Speaker Change: Operating cash flow for the quarter and trailing 12 months was <unk> 8 billion and $4 3 billion respectively.
Speaker Change: Capex for the quarter and trailing 12 months was $188 million and $1 2 billion respectively.
Speaker Change: We continue to expect fiscal 'twenty, four capex to be roughly $700 million, which is a reduction of approximately 45% versus 2023 as our hybrid manufacturing investment cycle papers.
Speaker Change: Not included in these figures are the benefits from both the European and U S chip sacks.
Richard C. Puccio: During the last 12 months, we generated $3.1 billion of free cash flow, or 29% of revenue. Over the same time period, we have returned roughly 110% of our free cash flow via dividends and share repurchases. As a reminder, our policy is to return 100% of free cash flow to our shareholders over the long term. Now I'll turn to the third quarter.
Speaker Change: During the last 12 months, we generated $3 1 billion of free cash flow or 29% of revenue.
Speaker Change: Over the same time period, we have returned roughly 100, 110% of our free cash flow via dividends and share repurchases. As a reminder, our policy is to return 100% of free cash flow to our shareholders over the long term.
Speaker Change: Now I'll turn to the third quarter outlook.
Richard C. Puccio: Revenue is expected to be $2.27 billion, plus or minus $100 million, up 5% sequentially at the midpoint. Once again, we expect sell-through to be higher than sell-in. At the midpoint, we expect all B2B markets to increase sequentially with the fastest growth in industrial, and for consumer to exhibit seasonal strength. Operating margin is expected to be 40%, plus or minus 100 basis points. Our tax rate is expected to be between 11 and 13 percent, and based on these inputs, adjusted EPS is expected to be $1.50, plus or minus 10 cents.
Speaker Change: Revenue is expected to be 2.2 dollars 7 billion, plus or minus $100 million up 5% sequentially at the midpoint. Once again, we expect sell through to be higher than sell in at the midpoint. We expect all of <unk> markets to increase sequentially with the fastest growth in industrial and for consumer to exhibit seasonal strength.
Speaker Change: Operating margin is expected to be 40% plus or minus 100 basis points. Our tax rate is expected to be between 11% and 13% and based on these endpoint inputs. Adjusted EPS is expected to be $1, 50, plus or minus 10 sacks.
Richard C. Puccio: Before passing it back to Mike to begin Q&A, I'll share some final thoughts on our near term. As Vince indicated, we believe we are at the beginning of a cyclical recovery as our bookings increased throughout the quarter, and we exited 2Q with a book-to-bill above parity for the first time in well over a year. No doubt, cyclical transitions can be challenging, but they also provide opportunities for outsized business acceleration when approached with a balance of fiscal discipline, smart risk-taking, and strong execution. ADI has always excelled in these areas, and we look forward to driving outstanding value for our stakeholders in the quarters to come. With that, I'll pass it back to Mike for Q&A.
Speaker Change: Before passing it back to Mike to begin Q&A I'll share some final thoughts on our near term as.
Speaker Change: As Vince indicated we believe we are at the beginning of a cyclical recovery as our bookings increased throughout the quarter and we exited <unk> with a book to bill above parity for the first time in well over a year.
Speaker Change: No doubt cyclical cyclical transitions can be challenging, but they also provide opportunity for outsized business acceleration when approach for the balance of fiscal discipline.
<unk> risk, taking and strong execution Adi has always excelled in these areas and we look forward to driving outstanding value for our stakeholders in the quarters to come.
Mike: With that I'll pass it back to Mike for Q&A.
Michael C. Lucarelli: Thanks Rich. Let's get to the Q&A session. We ask that you limit yourself to one question in order to allow for additional participants on the call this morning. If you have a follow-up question, please re-cue and we'll take your question if time allows. With that, can we do our first question, please?
Mike: Thanks, Rich, let's go to the Q&A session. We ask that you limit yourself to one question in order to allow for additional participants on the call. This morning.
Mike: If you have follow up question. Please re queue and we'll take your questions as time allows.
Speaker Change: We have our first question please.
Operator: For those participating by telephone dial-in, if you have a question, please press star 11 on your phone to enter the queue. If your question has been answered and you wish to be removed from the queue, please press star 11 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 list. Our first question comes from the line of Tore Svanberg. Sivenberg from Stifel.
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.
Speaker Change: Your question has been answered or you wish to be removed from the queue. Please press star one one again.
Speaker Change: Listening on a speaker phone please pick up the handset when asking your question, we'll pause for just a moment to compile the Q&A roster.
Speaker Change: Our first question comes from the line of towards Steven Berg from Stifel.
Tore Egil Svanberg: Yes, thank you, and congratulations on finding the recovery here. I had a question about the outlook for Q3, specifically in industrial. I think you indicated that you expect industrial to be the strongest performer this quarter. I was hoping you could talk a little bit about what's behind that strength between, you know, end market demand, inventory replenishment, and if there's any subsegments within industrial that's driving that outperforming growth. Thank you
Yes, thank you and congratulations on finding their recovery here.
Speaker Change: I had a question about the <unk>.
Speaker Change: Outlook for Q3, specifically in industrial I think you indicated that you expect industrial to be the strongest performer this quarter.
Speaker Change: I was hoping you could talk a little bit about what's behind that strength between end market demand inventory replenishment.
And if there's any sub segments within industrial thats driving that outperforming growth. Thank you.
Richard C. Puccio: This is Rich, and I'll take that one. So industrial obviously is our most diversified and profitable end market, and it's weathered an unprecedented broad-based inventory correction over the past year. Importantly, we expect Q2 to be the bottom for industrial, and it will grow in the second half starting here in 3Q. Stronger PMIs are supporting the broad-based bookings we've seen for three consecutive quarters now. And as mentioned in the prepared remarks, we're planning to reduce channel inventory further in Q3, which impacts the industrial market more than any other market.
Speaker Change: Sure. This is Richard and I'll take that one so industrial obviously is our most diversified and profitable end market and it's why that an unprecedented broad based inventory correction over the past year Importantly, we expect Q2 was the bottom for industrial and it will grow in the second half starting here in <unk>.
Speaker Change: Stronger PMI are supporting the broad based bookings we've seen for three consecutive quarters now.
Speaker Change: And as mentioned in the prepared remarks, we're planning to reduce channel inventory further in Q3, which impacts industrial more than any other market. This will be more than a year of under shipping consumption. One reason, we believe inventory headwinds have stabilized for industrial.
Richard C. Puccio: This will be more than a year of under-shipping consumption, one reason we believe inventory headwinds have stabilized for industrial. Given these dynamics and the exciting design wins and AI-related tailwinds in our instrumentation and test business, which Vince alluded to, we feel strongly we are at the beginning of the industrial recovery.
Speaker Change: Given these dynamics and the exciting design wins in AI related tailwind in our instrumentation and test business, which Vince alluded to we feel strongly we are at the beginning of the industrial recovery.
Vincent T. Roche: Yeah, I think one other piece of good news Tori is that obviously the aerospace and defense business is doing well. We've got a lot of high prospects for that over the coming years, but I think, in general, geographically. It's been on the up in terms of demand, and across most of the segments, and particularly the ones at Richpoint. And Tore, on the Oluwakami, you're right, just to clarify.
Speaker Change: One other piece of color Corey is that obviously, the aerospace and defense business is doing well, we have a lot of high prospects for that over the coming years, but I think in general geographically it's Ben.
Speaker Change: It's built on the upward in terms of demand.
Speaker Change: Cross most of the segments.
Vincent T. Roche: And Tore, on the Outlook comment, you're right. Just to clarify what we said, of the B2B markets, industrial is growing the fastest. Consumer will grow faster than industrial in 3Q. So if you want to just kind of back it down a little bit, consumer is probably growing about 10% sequentially, and industrial is probably closer to mid-single digits. And the other two markets are probably a little bit below that industrial level, but all markets should grow in 3Q.
Speaker Change: The ones that rich pointed.
Speaker Change: And Tori on the outlook comment Youre right just to clarify what we said of the <unk> markets industrial grow the fastest consumer will go faster than industrial and <unk>. So if you wanted to kind of back of the envelope it consumers, probably growing about 10% sequentially and industrial probably closer to mid single digits and the other two markets are probably a little bit below that industrial level. The all markets should grow.
Speaker Change: And <unk>.
Very helpful. Thank you.
Speaker Change: Thank you.
Speaker Change: One moment for our next question.
Operator: One moment for our next question. Our next question comes from the line of Stacy Rasgon from Bernstein Research. Hi, guys. Thanks for taking my question. I wanted to
Our next question comes from the line of Stacy <unk> from Bernstein Research.
Speaker Change: Hey, guys. Thanks for taking my question.
Stacy Aaron Rasgon: Wanted to ask you about the book to Bill. So it's above one is it above one in all the segments or is it just above one in industrial.
Stacy Aaron Rasgon: Yeah, sure. It's actually, so, good questions.
Stacy Aaron Rasgon: Got.
Speaker Change: It's actually it's a good question is above one in all end markets not all applications within the end markets are above one now and if you think about the shape of that bookings throughout the quarter. We talked about last earnings call bookings improved and started below parity at exit the quarter above parity and thats across all markets and geographies, but again I realize not all applications and we talked a little bit.
Unknown Executive: Is it above one in all end markets? Not all applications within end markets are above one, though. And if you think about the shape of bookings throughout the quarter, as we talked about on the last earnings call, bookings improved. And they started below parity and ended the quarter above parity, and that's across all markets and geographies. But again, I reiterate, it's not all applications. And we talked a little bit about on the last question about what applications are above others. You can think of some instrumentation, some automation, some aerospace and defense within industrial. So broad-based improvement in bookings across all markets and geographies is really the main takeaway.
And the last question about what applications are above one and you can think of some instrumentation. Some automation in aerospace and defense within industrial is so broad based improvement in bookings across all markets and geographies is really the main takeaway.
Speaker Change: Got it that's helpful. Thank you.
Stacey: Thank you Stacey.
Speaker Change: Thank you.
Speaker Change: One moment for our next question.
Speaker Change: Yes.
Operator: One moment for our next question. Our next question comes from the line of Toshiya Hari from Goldman Sachs.
Speaker Change: Yeah.
Speaker Change: Our next question comes from the line of Toshio Harry from Goldman Sachs.
Toshiya Hari: Hi, good morning. Thank you so much for taking the question. I wanted to ask you about the back half of the calendar year and how you're thinking about the shape of the recovery. You know, Vince, you've lived through many cycles.
Toshiya Hari: Hi, good morning. Thank you so much for taking the question.
Toshiya Hari: I wanted to ask about the back half of the calendar year, and how youre thinking about the shape of the recovery.
Vincent T. Roche: I think typically, you know, the same way we underestimate the magnitude of the pace of the downturn, we collectively underestimate the pace of the upturn. So, I'm curious if you expect this upturn to be similar to past cycles and we kind of follow those patterns, or do you see anything in the marketplace today or anything from customers that would indicate, you know, something materially different? in terms of the shape of the upturn.
Speaker Change: Vince you've you've lived through many cycles.
Vince: I think typically the same way, we underestimate the magnitude of the pace of the downturn.
Vince: Collectively underestimate the pace of the upturn. So I'm curious if you expect this upturn to be similar to past cycles, and we kind of followed those patterns or do you see anything in the marketplace. Today are anything from from customers that would indicate something materially different.
Vincent T. Roche: Yeah, thanks Toshiya. Yeah, look, first off, we believe we've seen the bottom of the cycle. And, you know, as Mike indicated, the stronger PMIs that we've seen, particularly in the industrial sector, give us a lot of confidence, and there's a strong correlation between our industrial business, which is about half of the company's total revenue. So, And as we've said a few times,
Speaker Change: In terms of the shape of the upturn. Thank you.
Vincent T. Roche: Thank you. Yeah, thanks, Toshiya. So...
Speaker Change: Thanks sure so yeah.
Speaker Change: Yes first off we believe we've seen the bottom of the cycle.
Speaker Change: Sure.
Speaker Change: As Mike indicated the stronger <unk> that we've seen particularly in the industrial sector gives us a lot of confidence and there's a strong correlation between.
Speaker Change: Between our industrial business, which is about half of the company's total revenue.
Speaker Change: So.
Speaker Change: And as we've said now a few times.
Vincent T. Roche: Bookings and backlog coverage out, you know, for the next several months beyond this quarter would give us strong indications that we expect continued growth during the second half of the year. I'll also point out, I think, you know, for 2025, we will have a brisk growth year. That's my sense. And, you know, we're asked all the time, what's the shape going to be? Well, I don't really know what the exact shape is going to be, but I think we're on an upward trajectory. We have confidence in that across the board.
Speaker Change: Bookings and backlog coverage out for the next several months beyond this quarter would give us.
Speaker Change: Strong indications that we expect.
Speaker Change: Continued growth during the second half of the year I'll also point out I think.
Speaker Change: For 2025, we will have a brisk growth year, that's my sense.
Speaker Change: And were asked all the time, what's the shape going to be well I don't really know what the what the exact shape is going to be I think we're on the upward trajectory, we have confidence in that across the board.
Speaker Change: Thank you.
Speaker Change: Thanks to ship.
Operator: Thank you. One moment for our next question. Our next question comes from the line of Vivek Arya from Bank of America Securities.
Speaker Change: Thank you one moment for our next question.
Speaker Change: Okay.
Speaker Change: Our next question comes from the line of Vivek Arya from Bank of America Securities.
Vivek Arya: Thanks for taking my question. Vincent, what is the right way to understand the true change in end demand if we set aside all the inventory fluctuations? So, for example, is it worthwhile seeing what distribution sold through year on year in Q2? You know, what is the assumption for Q3. And does that inform us in any way about, you know, can Q4 be seasonal, you know, whatever the version of seasonality? I'm just trying to see, right, the right way of looking at what end demand is doing, setting aside all this inventory noise.
Speaker Change: <unk>.
Vivek Arya: Thanks for taking my question.
Vivek Arya: What is the right way to understand the true change in end demand. If we set aside all the inventory fluctuations for example.
Speaker Change: Is it worthwhile seeing what the distributions tell to do year on year in Q2, what is the assumption for Q T and does that inform us in any way about Ken.
Speaker Change: In Q4 be seasonal.
Speaker Change: Whatever it is a version of seasonality, yes, I'm trying to see the right apples to apples way of looking at what is end demand doing setting aside all of this inventory noise.
Vincent T. Roche: Yeah, look, I think it's very hard to answer that question simply because, you know, when history is written, we're going to get the average of what happened pre-pandemic and post-pandemic. So there's been so much ringing in the system, you know, demand overshoots, and then demand undershoots. But my sense is, certainly from our perspective, I think we're very well positioned to be able to capture the upside if things grow faster than we expect. We've got a lot of inventory on the balance sheet. We've, you know, we've kept inventory closer to ADI, less downstream.
Speaker Change: Yeah.
Speaker Change: Yes, well look I think it's very horizontal that question simply because when history is written we're going to get the average of whats happened pre pandemic and post pandemic. So there's been so much ringing in the system.
Speaker Change: Demand overshoot.
Speaker Change: And then demand under shoot.
Speaker Change: But my sense is that certainly from our perspective I think.
Speaker Change: We're very well positioned to be able to capture the upside if things grow faster than we expect we've got a lot of inventory on the balance sheets.
Speaker Change: We've kept inventory closer to Adi less downstream.
Vincent T. Roche: And, you know, with the, we've got as well a tailwind here from AI, which I think is going to be a multi-year tailwind. So we've got that pushing us along, but at the same time, we still have high interest rates, and we still have relatively high inflation in many places. So I think ultimately, the size of the recovery and the pace of the recovery will have a strong economic and geopolitical tone.
Speaker Change: Sure.
Speaker Change: And what.
Speaker Change: We've got as well a tailwind here from AI, which I think is going to be a multiyear tailwind. So we've got that pushing us along but at the same time.
Speaker Change: We've got.
Speaker Change: We've got still we've got high interest rates, we've got still relatively high inflation in many places so I think ultimately.
Speaker Change: The size of the recovery and the pace of the recovery will have a strong economic.
Speaker Change: Economic and geopolitical tone to it but I mean overall my sense as well.
Vincent T. Roche: But I mean, overall, my sense is that we'll see good growth for the remainder of this year and strong growth in 25 and beyond that. You know, I think we've got many, many growth drivers that we feel very confident about. We're selling more value to each of our customers and each of our segments, and I feel good about the place that semis are in as an industry right now as well in terms of overall demand as the edge becomes more intelligent and the cloud builds out.
Speaker Change: We'll see.
We will see good growth for the remainder of this year and strong growth in 'twenty five and beyond that.
Speaker Change: I think we've got many many growth drivers that we feel very confident about we're selling more value into each of our customers in each of our segments.
Speaker Change: And I feel good about the place that semi is or and as an industry right now as well.
Speaker Change: Terms of.
Overall demand.
Speaker Change: As the edge becomes more intelligent and the cloud builds out so.
Vincent T. Roche: So, But it's very, very hard to give you an answer on the puts and takes. I mean, the dynamics of the relatively near term are hard to decode, but what we can tell you is... Given where PMIs are at, given where our demand's at, we're in a recovery.
Speaker Change: But very very hard to give you an answer on the puts and takes you mean the dynamics of the relatively near term.
Speaker Change: Our heart to the cold, but what we can tell you is given where PMI has RF, given where our demand yet we're in a recovery phase.
Richard C. Puccio: Yeah, and Vince, I would add to that, you know, while it's impossible to get perfect visibility into our end customer inventories, certainly, the signals that we monitor tell us that customer inventories are much healthier than they were previously as we enter the second half. This is also aided by our belief that we have been under-shipping.
Vince: And Vince I would add to that while it's impossible to get perfect visibility into our end customer inventory certainly the signals that we monitor telestich customer inventories are much healthier than they were previously as we entered into the second half and this is also aided by our belief that we have been under shipping.
Vince: Under consumption for over a year now both in the channel and direct.
Vivek Arya: And on the channel commentary, Vivek.
Speaker Change: But on the channel commentary about quantification of what the sell through has been in the reported quarters year on year.
Richard C. Puccio: Yeah, I can help you out there, Vivek. I think your question is kind of what to sell in versus sell through. We talked about reducing the channel inventory by about 100 million. We achieved that in our 2Q. We actually did a little better than that.
Speaker Change: Yes, I can help you out there, but I think your question is kind of what sell in versus sell through.
Speaker Change: We talked about last time, you got it.
Speaker Change: Yes, we talked about reducing the channel inventory by about $100 million, we achieved that in our <unk> reacted a little bit better than that as you looked at <unk>, we will reduce channel dollars again, but not by that much not nearly 100 much less $100 million. So we're getting more normal in the channel as our weeks are coming down into our target range, so that normalization as hell.
Richard C. Puccio: As you look to 3Q, we'll reduce channel dollars again, but not by that much, not nearly 100, much less than 100 million. So we're getting more normal in the channel as our weeks are coming down into our target range. So that normalization is helping some of the growth, but sell-through is also increasing in 3Q from 2Q, which is really how we drive the business and look at for the indication. As you fast-forward to 4Q, if these bookings continue, we don't know, there's no reason to think we won't be more in balance in 4Q from a ship-in versus ship-out perspective as well.
Speaker Change: <unk> some of the growth, but sell through is also increasing in <unk> from Tokyo, which is really how we drive the business and look at indication as you fast forward to <unk>. If these bookings continue we don't know Theres no reason to think we won't be more imbalanced and <unk> from a shipping perspective as well and then we'll see how long do you guys from there.
Richard C. Puccio: And then we'll see how 1Q goes from there. So I think that's kind of the question you're asking is, there's a piece Rich talked about and Vince talked about, about the customer's inventory that's leaning out. If you look at us and what we're shipping in the channel, that's also normalizing, setting. Thank you.
Speaker Change: That's kind of the question you're asking is there as rich talked about and Vince talked about about the customer inventory. That's leaning out if you look at us and what we're shipping in the channel. That's also more also normalizing setting us up for a good second half of 2025.
Speaker Change: Alright, thank you.
Speaker Change: Thank you one moment for our next question.
Speaker Change: Okay.
Christopher Brett Danely: Thank you. One moment for our next question. Our next question comes from the line of Christopher Danely from Citigroup.
Speaker Change: Our next question comes from the line of Christopher Dan Lee from Citigroup.
Speaker Change: Hey, Thanks, Ken can.
Can you talk about the.
Speaker Change: The gross margin drivers from here, maybe touch on utilization rates and inventory trends and some of your competitors have talked about pricing.
Speaker Change: Turning to historical norms, if that happens can you still get the gross margins back to the previous peak.
Richard C. Puccio: Sure, I'll take that one. From a gross margin and utilization perspective, you know, we talked a little bit about this in the Q1 call. We expect both utilization and gross margin to bottom in our Q2. However, we do expect the pace of gross margin expansion in the second half to be modest, and specifically for Q3, we anticipate gross margin a bit above 67%. Looking from here, gross margin expansion is going to be dictated by continued revenue growth, mix of business, and utilization.
Speaker Change: Sure I'll take I'll take that one.
Speaker Change: Our gross margin and utilization perspective.
Speaker Change: We talked a little bit about this in the Q1 call. We expect both utilization and gross margin bottomed in our Q2. However, we do expect the pace of gross margin expansion in the second half to be modest and specifically for Q3, we anticipate gross margin a bit above 67%.
Speaker Change: Looking from here gross margins expansion is going to be dictated by continued revenue growth mix of business and utilization.
Richard C. Puccio: You know, from a balance sheet perspective, since our peak in Q3, we've reduced balance sheet inventory significantly, including over $70 million in Q2. For the third quarter, we expect to reduce inventory again, by a smaller amount than in Q2.
From a balance sheet perspective, since our peak in Q3, we've reduced balance sheet inventory significantly including over $70 million in Q2.
Speaker Change: For the third quarter, we expect to reduce inventory again by but at a lesser amount than in Q2 overall.
Richard C. Puccio: Overall, we executed pretty strongly against our inventory reduction goals while mitigating the impact on gross margin, leveraging our dynamic hybrid manufacturing model. You know, one of the things that's been super helpful in protecting us in this trough is the flexibility to swing capacity back into our fabs to help maintain utilization. We've done that effectively, which is why we called the floor on utilization. So I expect that utilization, as the demand continues to increase, will start to increase and aid in our margin expansion. You know, from a channel perspective, as Mike mentioned, from a channel perspective, our goal was to reduce by $100 million, which we achieved. We will reduce an additional amount in Q3 to a lesser degree.
Speaker Change: Executed pretty strongly against our inventory reduction goals, while mitigating the impact on gross margin leveraging our dynamic hybrid manufacturing model one of the things Thats been super helpful. On protecting us in this trough has the flexibility to swing capacity back into our fabs to help maintain utilization.
Speaker Change: We've done that effectively which which is why we called the floor on utilization.
Speaker Change: The fact that utilization as demand continues to increase we will start to increase.
Speaker Change: And aid in our margin expansion.
Speaker Change: From a channel and as Mike mentioned from a channel perspective, our goal was to reduce by 100 million, which we achieved we will.
Speaker Change: Reduced an additional amount in.
Speaker Change: In Q3, it to a lesser degree and ultimately we expect that this will get us firmly back into our target range of seven to eight weeks of inventory.
Vincent T. Roche: You know, and ultimately, we expect that this will get us firmly back into our target range of seven to eight weeks of inventory in the channel. Now, let me make a comment on the pricing side of things. So across the portfolio, our pricing has been very, very stable, and I expect that to continue. Our products are very sticky to franchise, it's very diversified, and it has lots of long-life products in it. And, you know, we tend to hang on to our sockets for, you know, I think on average, more than a decade.
Speaker Change: In the channel, Yes, let me make a comment on the on the pricing side of things.
Speaker Change: So across the portfolio our pricing has been very very stable and I expect that to continue.
Speaker Change: Products are very sticky the franchise is very very it's very diversified lots of long life products in it.
Speaker Change: And we tend to hang onto to our sockets for I think on average more than a decade.
Vincent T. Roche: So, you know, clearly where the competition is for the new sockets, right? But ADI has the premier innovation system in the analog mixed signal space. And we've been pushing that innovation. You know, while others are focused on volume, we're focused on value. So I think it's a very, very different approach.
Speaker Change: Clearly where the competition.
Speaker Change: Petition is for the new sockets right, but.
Speaker Change: Has the premier innovation system and the analog mixed signal space.
Speaker Change: And we've been pushing that innovation, while others are focused on volume we're focused on value.
Vincent T. Roche: We're not a commodity supplier at all, so we're not immune to price pressure, but we are more protected. I think we have a better moat because of the innovation value that we generate. And I'll note, as well, that our ASPs are more than four times the average. And it's our innovation premium that enables us as well to capture more value and to produce the kinds of gross margins that we do.
Speaker Change: So I think it's a very very different approaches because we are not a commodity supplier at all so we are we're not immune to price pressure, but we are more protected I think we have a better mode because of the innovation value that we generate and I'll note as well.
Speaker Change: Our asps are more than four times the average.
Speaker Change: And it's a.
Speaker Change: <unk> premium that enables us as well to capture more value and to produce the kind of gross margins that we do.
Speaker Change: Great. Thanks, guys.
Chris: Thanks, Chris.
Operator: One moment for our next question.
Speaker Change: Thank you.
Speaker Change: One moment for our next question.
Speaker Change: Our next question comes from the line of Ross Seymore from Deutsche Bank.
Ross Clark Seymore: Hi, guys. Congrats on the Mark in the trough and turning the corner. So I wanted to ask a bigger picture question I think it's been four years. Since you guys bought Maxim I believe it was four years prior to that with linear. So how are you looking at the M&A environment and are there any kind of pieces to the puzzle that you wish you had.
Ross Clark Seymore: Yeah, thanks, Ross. So, yeah, we've always acquired assets that keep ADI ahead of customers' needs; we tend to take a long-term view, keep ahead of our customers' needs. Obviously, we've been very, very selective. I would say, Ross, that it's fair to say that in terms of the scale and scope of the analog high performance franchise, we are where we need to be. So, you know, Analog Mixed Signal Power, we've got a wonderful power franchise now, but we've been adding, I alluded in my remarks or stated in my prepared remarks that we have been putting more software content, more digital content, and we've also been, for about seven or eight years now, developing... Machine Learning, Neural Networking Capability.
Speaker Change: Yes.
Ross Clark Seymore: Thanks, Ross so yes.
We've always acquired.
Speaker Change: Assets that get Adi ahead of customer's needs, we tend to take a long term view get ahead of our customers' needs.
Speaker Change: Obviously, we've been very very selective I will say Ross, it's fair to say that in terms of scale and scope of analog high performance franchise, we are where we need to be.
Speaker Change: So analog mixed signal power, we've got a wonderful power franchise no.
Speaker Change: But we've been adding.
Speaker Change: Alluded in my remarks, our stated in my prepared remarks that we have been putting more software content more digital content.
Speaker Change: We've also been for about seven or eight years know developing machine.
Speaker Change: Machine learning neural networking capability. So those are areas, where as the world becomes more and more software defined that is clearly in the area of where Adi has been organically investing we've done some more tuck in type <unk>.
Ross Clark Seymore: So those are areas where, you know, as the world becomes more and more software-based, that is clearly an area where ADI has been organically investing. We've done some more token-type acquisitions as well that help us in that area. But, you know, I think right now, we're really focused on making sure that we fully capture all the synergies from the revenue synergies from Max. And, but, you know, when we have it, we're always looking, by the way, we're always looking for ourselves. But clearly, I think analog is complete, and it's other areas we're now looking at. Thank you.
Speaker Change: Acquisitions as well to help us in that.
Speaker Change: Area.
Speaker Change: But.
Speaker Change: I think right now, we're really focused on making sure that we fully capture all the synergies from the revenue synergies from Maxim.
But.
Speaker Change: One we have.
Speaker Change: Always looking by the way, we're always looking for assets, but clearly I think analog is complete and its other areas were not looking.
Speaker Change: Thank you.
Speaker Change: Thanks Ross.
Speaker Change: Thank you.
Speaker Change: One moment for our next question.
Speaker Change: Okay.
Vincent T. Roche: Thank you. One moment for our next question. Our next question comes from the line of Mark Lopatius from Evercore ISI.
Speaker Change: Our next question comes from the line of Mark <unk> from Evercore ISI.
Mark Lopatius: Hi, thanks for taking my question. This is for you, I think.
Speaker Change: Hi, Thanks for taking my question.
Speaker Change: Or is it for you I think.
Speaker Change: If you look at your if you adjust your revenues for <unk>.
Vincent T. Roche: If you look at your revenues for, you know, the step function increase that you had for pricing, it looks like on a unit basis, you're shipping 25% below the trend line. And I don't think you've shipped that far below your long-term trend line since the world financial crisis. And at the same time, that's happening, you talked about your customers lowering the supply chain, lowering inventories. You're lowering inventories.
Speaker Change: The step function increase that you had for pricing.
It looks like on a unit basis, Youre shipping, 25% below the timeline and I don't think you shipped that far below your long term trend line since the world financial crisis.
Speaker Change: And at the same time, that's happening you talked about your customers lowering the supply chain lowering inventories youre lowering inventories and it seems like there's a real risk that.
Vincent T. Roche: And it seems like there's a real risk that, you know, the industry is setting up for you, and the industry is setting up for a really tight supply environment, maybe even as early as the end of this year or early next year. And I'm wondering, how much of a risk do you think we are going to enter into that kind of a scenario? And, you know, it seems like your customers never learn about, you know, trying to get their inventories right in order to see you on time.
Speaker Change: The industry is setting up for you and the industry is setting up for like a really tight supply environment, maybe even as early as the end of this year or early next year and I'm wondering how do you think is there a risk that we enter that kind of a scenario.
Speaker Change: And it seems like your customers, who never learn about trying to get their inventories right in the orders see you on time. So like is there something that's changed in your operations that enable you to.
Speaker Change: Adjust to that.
Speaker Change: What has historically happened, which is your customers overshoot on the downside on their inventories and then come in at the last second when things are really tight.
Vincent T. Roche: So, like, is there something that's changed in your operations that will enable you to adjust to that, you know, what has historically happened, which is your customers overshoot on the downside of their inventories and then come in at the last second when things are really tight? Thank you.
Speaker Change: Ed.
Vincent T. Roche: Yeah, well, Yeah, I think surging demand is a problem of high quality and, you know, as a company, we have virtually 200 days of inventory in our balance sheet staged primarily at the die stock level. So that gives us a tremendous amount of output that we could bring within weeks to the market. It's a question of packaging and testing, to a first approximation.
Speaker Change: Yes.
Speaker Change: Yes.
Speaker Change: Yes, I think surging demand is a problem of a high quality.
Speaker Change: As a.
Speaker Change: We have virtually 200 days of inventory in our balance sheet stage, primarily at the at the Diestock level. So.
Speaker Change: So that gives us a tremendous amount of.
Speaker Change: Outputs that we could bring within weeks to the market.
Speaker Change: A packaging and test to a first approximation.
Vincent T. Roche: Obviously, we're carrying finished goods as well. We have also spent $2.5 billion plus on making sure that we have internal capacity in our four internal fabs. To be able to meet the demands across the nodes that produce most of the revenue for ADI, we've got great partners, partners like TSMC, for example, who are, you know, a critical part of our hybrid manufacturing model. So I think in terms of the ability to be able to address a really short order snapback is good, just given the coverage that we've got with internal inventories.
Speaker Change: Obviously, we're carrying finished goods as well.
Speaker Change: We have also spent.
Speaker Change: <unk>.
Speaker Change: $2 $5 billion, plus on making sure that we have internal capacity and our four internal fabs.
Speaker Change: To be able to meet the demands across.
Speaker Change: The nodes that produce most of the revenue for Adi We've got Great partners partners like TSMC for example.
Speaker Change: Who are.
Speaker Change: A critical part of our hybrid manufacturing model. So I think in terms of the ability to be able to address a really short.
Speaker Change: Order snapback is good just given the coverage that we've got them with internal inventories are distributors occurring virtually eight weeks as well as inventory.
Vincent T. Roche: Our distributors are carrying, you know, virtually eight weeks of inventory. And then we've got all this new capacity. We've more than doubled the internal capacity on the critical nodes that, you know, address every single market that we participate in. So I think in terms of manufacturing agility and inventory, we're in good shape. That's very helpful.
Speaker Change: And then we've got all this new capacity, we've more than doubled the internal capacity.
Scott: The critical nodes Scott.
Scott: Address every single market that we.
Scott: That we participate in so I think in terms of manufacturing agility inventories were in good shape.
Vincent T. Roche: Very helpful. Thank you. Thanks, Mark.
Speaker Change: That's very helpful. Thank you.
Mark: Thanks Mark.
Operator: One moment for our next question. Our next question comes from the line of Harlan Sur from J.P. Morgan.
Speaker Change: Thank you.
Speaker Change: One moment for our next question.
Speaker Change: Our next question comes from the line of Harlan sur from Jpmorgan.
Harlan Sur: Yeah, good morning.
Speaker Change: Yes. Good morning, Thanks for taking my question and great job on the quarterly execution.
Harlan Sur: Thanks for taking my question. Great job on the quarterly execution. You know, within your distribution business, it's about 60% of your overall revenues. You can monitor sell through in real time, which allows the team to tightly control the inventories into this channel. On the direct business, there is less visibility on consumption levels of inventory here. I think direct customer orders to you are probably the best indicator of where they are in terms of their inventory targets.
Speaker Change: Within your distribution business, it's about 60% of your overall revenues you can monitor sell through in real time, which allows the team to tightly control the inventories into the channel on the direct business less visibility on consumption levels of inventory here I think direct customer orders to you are probably the best.
Indicator of where they are in terms of their inventory target. So is the return to quarter on quarter growth in July and second half optimism.
Harlan Sur: So is the return to quarter-on-quarter growth in July and second half optimism about growth being driven by order growth at direct customers as well? And then just any qualitative differences on the residual excess inventory, Disney versus direct?
Speaker Change: On growth being driven by order growth at direct customers as well and then just any qualitative differences.
Speaker Change: On the residual excess inventory does Steve versus direct.
Michael C. Lucarelli: Yeah. Hi, Harlan. It's Mike.
Mike: Yes, Harlan, it's Mike Yes, the <unk>.
Mike: The Orange, we talked about our direct orders as well as channel orders, but what's driving the growth is direct sales channel on a sell through basis as well Jim it's directly to end customers. So yes, it's not about we're not growing because the channel refilling, we're growing because it's real demand out there on the end market level as all of our markets.
Michael C. Lucarelli: Yes. The direct orders we talked about are direct orders as well as channel orders. But what's driving the growth is direct sales out of the channel on a sell-through basis, as well as shipments directly to our end customers. So yes, it's not about us growing because the channel is filling up; we're growing because there's real demand out there at market level across all of our markets.
Michael C. Lucarelli: We expect to reduce both the balance sheet and channel inventory further in Q3 while growing.
Mike: We expect to have reduced both balance sheet and channel inventory further in Q3, while growing.
Michael C. Lucarelli: That's it for this question, Harlan. Yes, it does. Thank you.
Speaker Change: Passenger capacity at Heartland.
Speaker Change: Yes. It does thank you.
Operator: We'll go to our last question, please. Thank you.
Speaker Change: Alright, well go to our last question. Please.
Operator: One moment for our next question. Our next question comes from the line of Joseph Moore from Morgan Stanley.
Speaker Change: Thank you.
Speaker Change: One moment for our next question.
Speaker Change: Our next question comes from the line of Joseph Moore from Morgan Stanley.
Joseph Lawrence Moore: Great, thank you. I wanted to also touch on your margin profile. You used to peak with operating margins in kind of the low 40s. And now you're, you know, as you said, you would, in a very difficult trough; you're troughing it for the full year, probably above 40. So that's a pretty good structural improvement. Can you talk about that? You know, what's been going on? If you sort of look over a decade, why is your through cycle margin profile going up?
Joseph Lawrence Moore: Great. Thank you I wanted to also touch on your margin profile you used to peak it was operating margins in kind of the low forties and now you are.
Speaker Change: You said you would.
Speaker Change: In a very difficult trough, you're chopping it for the full year, probably about 40.
Speaker Change: So that's pretty good structural improvement can you talk about that what's been what's going on if you sort of look over a decade why is your through cycle margin profile going up so much.
Richard C. Puccio: Yeah, so I think a couple of things, right? As we've talked about, the resiliency of our manufacturing process allows us to swing capacity in and out, which allows us to offset some of the down cycle pressure on margins because we're able to keep utilizations at a higher level given that swing capacity. Obviously, we continue to look for productivity and are executing on productivity improvements across all of our internal fabs, so I think that helps.
Speaker Change: Yes, so I think a couple of things right as we've talked about.
Speaker Change: The resiliency of our manufacturing process allows us to swing capacity in and out which allows us to offset some of the.
Speaker Change: Downcycle pressure on margins, because we're able to keep utilizations at a higher level given that swing capacity, obviously, we continue to look for productivity.
Richard C. Puccio: And then if you think of, you know, from an overall operating margin perspective, we've been demonstrating and will continue to demonstrate pretty strong operational control over expenses. You know, when we look, we expect we'll continue to see expansion in the margin as we grow. And as revenue returns to a growth phase, you know, we will get comfortably back into our long-term margin model. Yeah, I think Joe as well.
Speaker Change: And are executing on productivity improvements across all of our internal fabs. So I think that helps.
Speaker Change: And then if you think at an overall operating margin perspective.
Speaker Change: We've been demonstrating and will continue to demonstrate pretty strong operational control over expenses.
Speaker Change: When we look we expect we will continue to see expansion in the margin as we grow.
Joe: And as and as revenue returns to a growth phase we will get you comfortably back into our long term margin model, Yes, I think Joe as well in addition to what Richard said, it's important to point out that.
Vincent T. Roche: In addition to what Richard said, it's important to point out that, first and foremost, we're innovation-centered. And if you look at the vintage vans of our products in each of the segments, the big segments that we address, industrial, automotive, consumer, and communications, we're seeing ASP increases year on year. We're putting more value into our products, and we're capturing more value. So I think that is kind of the root of things when I look forward. That's, I mean, that's what's happening to the margin story for ADM. Our diversity helps us a lot, you know; our franchise isn't as price sensitive as many.
Speaker Change: First and foremost we're innovation centers.
Speaker Change: And if you look at the.
Speaker Change: The vintage bands of our products in each of the segments the big segments that we address industrial.
Speaker Change #100: Emotive consumer and communications, we're seeing ASP increases year on year.
Speaker Change #101: We're putting more value into our products, we are capturing more value. So I think that is kind of the root of things when I look forward.
Speaker Change #101: I mean, thats whats happening to that's the origin. If you like of the margin story for Adi.
Speaker Change #101: Our diversity helps us a lot.
Speaker Change #101: Our franchise isn't.
Vincent T. Roche: And, as I said earlier, life cycles matter, you know, when we get our products designed, and the pricing is tremendously stable. The other thing that's been happening from a price dynamic over the last several years is that, whereas Moore's Law kind of taught everybody that we could give back lots of the value that was generated in prior years, in the new year, you know, that has stalled. That has stopped. We ask in total roughly zero now. We don't give price away. We compete for sockets and Computed Innovation, but that is really the origin of ADS emergence.
Rice sensitive as many.
Speaker Change #101: And.
Speaker Change #101: As I said earlier lifecycle as matter when we got our products designed in the pricing is tremendously stable. The other thing that's been happening from a price dynamic over the last several years is that.
Speaker Change #101: Whereas moores law kind of taught everybody that we could give back lots of the value that was generated in prior years in the new year.
Speaker Change #101: That has stalled that has stopped we us and talked roughly two zero no we don't give.
Speaker Change #101: The way we compete for sockets.
Speaker Change #101: Computer of innovation, but that is origin of Adi's margin story.
Michael C. Lucarelli: Thank you, Joe. And thanks, everyone, for joining us this morning. A copy of the transcript will be available on our website, and all reconciliations are there as well. Have a great Memorial Day weekend and thank you for listening to ADI's call.
Speaker Change #101: Alright, Thank you Joe and thanks, everyone for joining us this morning, a copy of the transcript will be available on our website.
Speaker Change #101: And all of our reconciliations are there as well have a great Memorial day weekend.
Speaker Change #101: Thank you for listening on this call.
Operator: This concludes today's Analog Devices conference call. You may now disconnect.
Speaker Change #102: This concludes today's analog devices conference call you may now disconnect.
Speaker Change #102: Okay.
Speaker Change #102: Okay.
Speaker Change #102: [music].
Speaker Change #102: Okay.
Okay.
Speaker Change #102: [music].