Q3 2019 Earnings Call
Thank you Charles and good morning, everybody. Thanks for joining our third quarter fiscal 2019 conference call.
With me on the call today are 80, I'd CEO Vincent Roche.
Maybe I'd CFO for shopping the handover John .
Anyone who missed the release you can find it so they financial schedules and investor dialogue Dot com.
No wonder the disclosures the information, we're about to discuss including our objectives and outlook includes forward looking statements.
Actual results may differ materially from these forward looking statements as a result of various factors, including those discussed in our earnings release and our most recent 10-Q.
Before looking thing, which reflect our opinion as the date of this call. We undertake no obligation to update these forward looking statements in light of new information or future events.
Our comments today about <unk> third quarter fiscal 2019 finance results in short term outlook will also include non-GAAP financial measures, which exclude special items.
The cooker results historical performance special items are also excluded from these prior quarter's and year over year results.
Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures and information about the non-GAAP measures are included in today's earnings release.
I also want to point out that during the third quarter, we improved our method to more accurately estimate the end market classification for shipments to distributors.
This resulted in some modest changes to our historical end market revenue breakdown, but did not trade or toll revenue 40 bps. We have posted a quarterly end market look back based on this improvement the tour investor website.
Okay with that I'll turn over to FDIC O visit wrote this.
Thanks, very much Mike and good morning to you all well in what continues to be a challenging macroeconomic environment, we executed soundly in our third fiscal quarter and delivered solid results.
Revenue of 1.4 billion in the third quarter came in above the midpoint of our guidance, our b to b markets decreased 3% year over year, given the weaker macro conditions and performed well relative to the market.
This performance is a testament to the diversity of our franchise and investing ahead of secular trends to drive ongoing share gains and some expansion.
Operating margins of approximately 41% were above our guidance as we move quickly through juice expenses, given the ongoing market weakness all told adjusted EPS was $1.26.
Over the past 12 months, we've generated approximately $2 billion in free cash flow or 33% of revenue.
And during the same time period, we have returned more than 100% of free cash flow to our shareholders after debt repayments.
No wonder are clearly a number of nearer term external challenges were not forgetting true.
It really has always been and remains focused on delivering sustainable long term profitable growth.
To that end before push on covers our financial results in more detail.
I'm going to continue our quarterly practice of providing a deeper level of insight into one of our markets the trends influencing its future and how we are positioned to capitalize on these trends over the long term.
So today I'd like to discuss the emerging automotive electrification ecosystem that are supporting a number of underlying industries from energy to transportation manufacturing and indeed beyond.
And paving the way for the transition to cleaner energy sources.
Hey, guys always been focused on making the most efficient use of energy and both our products and operations.
And I'm proud to say that we are playing an important role in this new wave of electrification.
We approach automotive electrification from an ecosystem perspective that is to say the electric vehicle is just one element.
For the origin of our journey starts with the formation of the battery.
If that extends to the ongoing management of an installed electric vehicles battery system.
And then to powering the supporting electrical infrastructure needed to fuel these.
The common thread woven through all of these applications is the precision signal processing control and power management capabilities they require.
Capabilities, indeed, and which Katie I excels.
So let me explain a bit more our value journey starts with battery formation and test a time consuming and complex chemical process were extremely precise measurement means the difference between a safe high quality battery.
And the low quality one.
The lithium ion batteries the power electric they represent nearly a third of the entire cost of the vehicle.
So Oems place a high premium on battery quality and reliability.
Our portfolio of fully integrated precision signal processing control and power products allows any eye to offer customers the highest levels of accuracy safety and reliability for their battery formation test process.
Our solutions were Jews battery promotion cost by two thirds by shrinking our customer's equipment footprint by four times, and enabling up to 95% powerreviews, which reduces environmental impact as well.
Once the battery system has been manufactured our opportunity grows with the electrification applications within the vehicle itself.
Sure our technology as a key enabler in the transition from combustion engines to cleaner electric vehicles, which are projected to grow from the current 2% worldwide vehicle sales to more than 20% over the next decade or so.
And the vehicle the battery management system, or Vms provide precise monitoring and control of the complex charge and discharge cycles of the battery system.
Accuracy on safety and the Vms or critical since overcharging or under charging can lead to the batteries destruction and rendered useless.
The accuracy of the BMS is also a major determining factor in the performance of the easy as it directly affects the miles per charge and electric vehicle can safely deliver.
And to add to the challenge the accuracy of these would be maintained through extreme environmental conditions and harsh interference over the 10 plus year lifecycle of the car.
Such an application challenge is a perfect fit for maybe.
Where we once again leverage our deep hermitage and accurate precision measurement to provide optimized solutions for battery management.
We've got the Industrys broadest IC portfolio supporting all battery voltages from Fourq to get votes to 800 Boes.
Covering the full range of premium electric vehicles, right down to the entry level.
Our products are also designed specifically for harsh automotive environments.
Enabling us to deliver up to 20% more miles per charge than our competition.
We delivered the highest level of automotive functional safety.
We have a full suite of powerful safety diagnostics that are easy to integrate and to use.
So thanks to these advantages we know the leadership position across key customers in the us Europe and Asia, giving us confidence that we can continue to grow Vms revenue.
Double digit annual rate.
And we continue to push the innovation curve.
Future generations on our Vms roadmap include architectural innovations that will improve the way power density accuracy in which leverages ourselves.
Including the ability to wireless lead and robustly communicate and finally.
Our opportunity extends beyond the car to the charging station infrastructure the sources stores and transfer the energy the Power's electric vehicles.
Charging stations represent a unique challenge for electric grids due to their intermittent substantial demand peaks and they must also effectively and cost efficiently meet the fast charging requirements consumers demand for their employees as a result charging stations will rely on battery powered energy storage systems to accurately and quickly charge vehicle.
Here are the precision of our Vms solution kind of reduce the total cost of ownership of the energy storage system by a third by extending the battery life by up to two times on lowering maintenance costs.
[noise] as demand for batteries rises we're beginning to see a push towards extending a batteries useful life.
By enabling the second place for easy batteries and infrastructure applications.
We believe in the eye is best in class measurement capabilities will become increasingly important as this market matures.
And the second life deployments begin to scale.
So in closing electrification represents a highly valuable market for any eye for the long term it presents a number of difficult challenges for our customers.
But our portfolio and people are transforming into opportunities every day.
Through our battery management power conversion connectivity and isolation technology, we're delivering innovative solutions that position us to capture revenue growth opportunities.
Throughout the electrification ecosystem today and well into the future.
And so with that let me hand over to for Sean who will take you through the financial details.
Thank you Vince.
Good morning, everyone and let me add my welcome to our third quarter earnings call.
My comments today with the exception of revenue and non op expenses will be on an adjusted basis, which excludes special items outlined in today's press release.
Before I get to the results for the quarter I wanted to provide some details related to the ongoing situation with quality.
A few weeks into our third quarter, the Commerce Department added them to the P.I.S. entity list.
80 immediately suspended shipments of all products.
After a thorough review of the export administration regulations and the entity lift restrictions.
We determined that we could loftily resume shipping selected EBI products to this customer.
We are closely monitoring this dynamic situation and feel that we are well positioned to adapt as the circumstances evolve.
The scope duration and long term financial impact of the export restrictions remain unclear and difficult to predict.
But at least for the near term our quality demand has taken a step down from previous levels.
As a result, we're planning for sales to this customer to be meaningfully below our previous mid single digit percentage range.
Which we discussed with you last quarter.
This is reflected in our guidance, which is published in our earnings release.
So now let's get on to the quarter.
Maybe I delivered a strong third quarter with revenue operating margin and EPS all above the midpoint of guidance.
Our beat to be revenue was down a modest 3% year over year.
As a growth in communications with balanced by ongoing weakness in industrial and automotive markets.
The industrial market, which represented 51% of sales in the quarter decreased 4% year over year.
And while most applications were down year over year, we saw continued strength.
In our aerospace defense healthcare and electronic test and measurement businesses.
Communications represented 21% of sales during the quarter and grew 7% year over year.
While both wireless and wired results were impacted by Qualys, our wireless sales still increased double digits year over year, driven by record revenue across multiple customers.
A testament to our balanced and market leading position in advanced radio systems used in the Fiveg infrastructure.
Automotive represented 15% of sales and was down 9% year over year reflective of the ongoing decline in global vehicle sales.
Year to date, our auto revenue is down.
Well digits year over year outperforming a declining SAR due to strength in BMS, which increased double digits over this time.
And the ongoing momentum in our power franchise.
And lastly, consumer made up 12% of sales and decreased 18% year over year.
So now let's go to the piano revenue for the quarter was above the midpoint of guidance at approximately 1.4 billion down 5% year over year.
Gross margins came in at 70.4%.
Down 20 basis points sequentially due to lower factory utilization.
And in what is normally a higher opex quarter due to our merit increases we reduced opex by $6 million sequentially to 438 million.
And as we continue to navigate these challenging times you can look for us to keep a tight rein on discretionary and non essential spending.
Our prudent to Opex spend offset slightly lower gross margins and resulted in op margin of 40.8% above the midpoint of guidance.
[noise] non op expenses in the quarter were down $4 million sequentially, driven by lower interest expense as we continue to reduce debt.
And the tax rate for the quarter was 14% inline with our outlook.
All told the adjusted diluted earnings per share for the third quarter came in above the midpoint of guidance at $1.26.
Let me comment on the balance sheet.
We exited the quarter at 129 days of inventory above the high end of our target range of 115 to 125.
This increase related primarily to weaker while we demand and as we discussed with you in the first quarter earnings call. The initial build of our bridge inventory to support the planned closure of two manufacturing facilities in early 2020 one.
As a reminder, we expect to generate 100 million of cost of goods synergies related to the east facility closures.
And during this transitional phase, we expect to carry an additional five to 10 days of inventory to support our customers.
Channel inventory was just over eight weeks as we exited the third quarter and Capex return to our normal level of 4% of sales were $58 million as much of our co location activities are now complete.
We generated approximately $2 billion of free cash flow over the trailing 12 months and during that time, we have returned more than 100% of our free cash flow to shareholders through dividends and buybacks after debt repayment.
Specifically in the third quarter, we repaid 300 million of debt.
Paid 200 million in dividends and repurchased over 100 million of our stock.
So now, let's move to guidance, which with the exception of revenue and non op expenses will also be discussed on an adjusted basis.
Revenue is expected to be 1.45 billion, plus or minus $50 million and at the midpoint, we expect our beat to be markets of industrial automotive and communications.
In the aggregate to decrease low to mid single digits year over year.
And there is a point of reference if we back quite we out of our year over year Q4 comparison.
B to B is roughly flat.
Operating margin is expected to be approximately 40% at the midpoint.
And non op expenses are expected to decline sequentially by approximately 5 million and the tax rate will remain in the 13% to 15% range.
Based on these inputs adjusted EPS is expected to be a $1.22 plus or minus seven cents.
So in closing.
We are pleased with our quarter results given the current macro and geopolitical climate and during these uncertain times, we will carefully manage our expenses, while also investing strategically in areas that continue to position us to deliver profitable growth over the long term.
So let me hand, it back to Mike So we can start our QNX.
Thank you Sean does get to the Q and a session. Please limit yourself to one question. After initial response will give an opportunity for a follow up question.
Cheryl we are first question please.
Thank you for those participating by telephone dial in if you have a question. Please press Star then the number one on your phone. If your question has been answered and you wish to be removed from the queue. Please press the pound key if you are listening on a speakerphone. Please pick up the handset when they are asking your question.
Our first question comes from John Pitzer from Credit Suisse. Please go ahead. Your line is open.
Hey, good morning, guys. Thanks.
Sure.
The solid results given the backdrop. Thanks.
You can you help put me better understand clearly I think one of the.
Consequently NIM.
The trade you mentioned in China.
Yes, Wally Wally 10, intend and be able to build a days thinking Rick Nolan us suppliers.
I'm wondering if you can help me understand from your perspective.
Could you play in.
You can you can while we do that.
Do you walk away adjusted Transactionally machine for the top you think there could be used to warm John will soften share loss.
As a nation and continued bonds.
Yes, Thanks John .
You know we've been as a company we're in business almost 55 years now and we've been competing with Polaris from all over the globe.
And.
All areas of our business different players in different spaces, but what I will say is in general we've taken the highest performance position and Fiveg base stations.
In the radio system.
And you know, whether that's Chinese Oems that are absorbing our products European wherever Korean.
That's our game.
And.
As these systems become ever more complex performance matters, more and more and more and more when you're trying to.
Really put more information density through every radio that's where we play and nobody competes with us at that level.
There are perhaps different ways to solve the problem.
You can sacrifice performance perhaps.
But if you're looking for the best in class Fiveg radio performance.
It's 80, I know that the Oems are coming too.
And you know one of the thoughts I want to leave you with John is that whatever happens you know whatever happens the.
The ongoing situation with regard to to walk away.
We are very well penetrated as a corporation across the globe with all the Oems. So no matter what happens we will grow in 2020 . That's the that is the expectation so.
You know competition is just the facet of doing business and we're more than well prepared with the portfolio of products we already have.
And the products that we have coming so I want to make it clear as well.
The restriction that we're experiencing with regard to shifting into into what was specifically is around fiveg, our legacy for Gi products.
Huffman shipping and as far as I understand we'll continue to ship so.
Oh, so it's a it's an evolving situation.
And we are doing everything we can to.
To be able to satisfy the needs of all our customers.
In China, specifically, we are in the process of seeking the lengths licenses that we need to support our products.
In the short to medium term here, so hopefully that answers your question John .
Thanks, Joe.
That's helpful.
Yes.
Into the performance of the shot mentioned.
Excluding to walk away your B to B business would be kind of flat year over year in the October quarter, which is meaningfully better than your peers is that mainly still just homes.
On which I think is well understood by investors can you talk about bottoms up drivers in the industry.
That might be helping you guys tried that outperformance on year on year growth.
Yes, I think in industrial is a it is much more than comps I think we're we're we're very pleased with how strong our industrial businesses, but let me have Mike kind of break down how to think about it on a year over year basis. If you back out while way, yes. So to John's question. So look our outlook the kind of assumed I'd say pretty much flattish year over year and industrial.
Alan if you move on to automotive, it's down about 10% and Coms also down about 10%, but we have to back out la conjures up once again year over year that is woodmark kind of I think our 11th and Twelveth quarter in a row of your of your growth in comps that kind of go into have been said about the breadth of our portfolio across customers and you move away from B to B and the consumer is down double digits and it kind of right in line for the year down about 20%.
I know that you want talk about industrial and kind of the strength, we're seeing there and why were doing better than our peers.
Yeah. So I think if you look at if you look at industrial and kind of two pockets. We have are more fragmented broader base business.
Specific the automation.
And I'd say that business right now given its high intensity capex needs is is weaker pretty much across all geographic spaces. At this point in time I don't think it will be a great surprise to tell you that the memory test business.
You know, it's been weak notes almost for a year.
And that persists it remains at least tepid.
But I think the areas, where we're seeing.
Most strength right now, our aerospace and defense and.
In fact, that's increasing just about 20% year on year.
Given the record defense budget that has just been passed in the us.
We're seeing good growth across all the soap applications within the aerospace and defense.
One of the.
One of the.
Real points of strength for us and what's driving a lot of the growth is the combination of the microwave and RF technologies from fit sites.
With the mixed signal products from <unk> and <unk>.
We're starting to bring LTC more aggressively into that space as well so that's a future.
Growth dimension in the aerospace and defense business healthcare continues to grow nicely I think in general.
A pretty public that I think that's a space, whose time has really come.
And I think this digital health area in general It was just an inflection point is just that the knee of the curve. So to speak so that's doing well for us across the board, whether its big iron ore clinical grade.
Patient monitoring type systems.
And you know given again the growth in areas like Fiveg Vms very very high frequency automotive radar safety systems.
The electronic test and measurement side of things is performing well also so I think that helps on the industrial story hopefully for you.
Thanks, John Thanks, Tom.
Thank you. Our next question comes from Tar Sands Burke.
From Stifel. Your line is open.
Good morning, Tony Yes.
Yes, good morning, and congratulations on the execution in this environment. First question is on communication said, Vince you said you expect to grow up pretty nicely in calendar 20, I was just hoping you could elaborate a little bit on what's driving that I mean is that when fiveg kind of really kicks in somebody's up until now a lot of the growth has been more four and a half g. So if you could elaborate on that please.
Yes, so I think starting the look I think the way to think about Fiveg is one of the most exciting new platforms to be introduced in the world.
Information and communications technology for several years so.
It's it's very.
I believe it will be very pervasive.
It's in the early stages of deployment, we're looking at a multi year cycle here and one of the things I think because that's important to remember with Fiveg is that.
It's really designed to enable b to b users.
To modify their business models in their offerings.
To their customers, whether it's an industrial motors and health care, where.
You know critical connection to the to the system is really important so I think it's less about the consumer more of a b to b.
You know data is doubling every couple of years, so the need for bandwidth.
And I'm very low latency is real and it's necessary and that whole debate that will continue to intensify overtime.
The only way to solve that as by delivering more special.
Our spectral efficiency.
So you know I think what we're seeing is very very early stage deployment.
And the radio it was one of the most critical elements in the.
Development and deployment of these new Fiveg systems.
And.
You know I think over the next three four years, we'll start to see the virtualization of the network and a more aggressive introduction of the microwave technologies as well.
That will be the next generation of Fiveg, So I think.
As you know as I said in the.
In an earlier comment there, we're very well positioned technologically the problems are getting tougher and tougher in the in the base station from a performance standpoint.
So the portfolio aligns very well it gets ahead of our customers' needs there and we're very well penetrated across the board in terms of the breadth of our portfolio and the depth of our portfolio.
I will also point out that.
The power portfolio from OTI.
Is is nicely fitting in as well so that's another wave of growth, but we'll begin to see materialized during 2020 2021.
Hey, Tony do a follow up.
Yes. Thank you for that Vince as a follow up you talked about the ILEC electrification and BMS I'm I'm, just wondering when you're talking to your automotive customers right now and especially given the sort of challenging Saar environment are you seeing.
An acceleration in the designs for Florida for B and C.
Not an easy.
Very definitely story I think if you know whether its European US you know Japanese or Asian Oems.
Oh, there is a pervasive move towards electrification of the powertrain. So.
The.
We're very confident that the Vms portfolio that we have we're on a fifth generation incidentally.
And.
You know having met several of these Oems over the last quarter or two I can tell you that theres a level of intensity and urgency to move more towards electrical car trains.
And given that.
Vms or electric power trains today represents around 2%.
Of all the vehicles built.
That's likely to increase by an order of magnitude over the next decade or so so I think it's very real I, certainly or growing in confidence.
This trends that we're seeing.
Is becoming.
More intense and it's something that we're very well positioned to take advantage of.
I mentioned as one of the prepared remarks.
We are moving on to yet another generation, we're changing the way.
The connectivity of the information is rendered in the car with our new wireless Vms architecture, which we introduced to the market and we'll start to see.
I think significant revenue a crew there in the kind of 2021 time.
Very helpful. Thank you.
We go to our next caller please.
Our next question comes from Mitch Steves from RBC capital markets. Your line is open.
Hey, guys. Thanks for taking my question. So I think the one of the more interesting things about 80, I just kind of the ramp in the content you guys are seeing on Fiveg. So I just want to clarify what you guys are talking about for 2020. So if we assume that hallway is entirely band you guys still believe you're going to see is I guess, a notable growth within communications is that fair.
Yes.
Yes, absolutely.
Yes. So it goes to one we have very good share across the ecosystem into the additional content. We see in the systems of two flavors really a fiveg outsiders to sub six gigahertz and those systems are silicon content is about fourx that of a traditional fourg and then as you move to higher frequency millimeter wave. It's additional content on top of that Forex. That's also an opportunity Brady I, that's really the 80 I hit a portfolio and also linear brand in there as well.
Got it Okay, and then secondly, I kind of want to turn it over quickly to the industrial segment. It looks like you guys are gaining share there I'm curious you get what you guys think the overall market is doing within industrial and if you guys think you. This is this is something you can sustain.
For the next few quarters as well I'm, not saying that the industrial segment grow but more just in terms of you guys being able to continue to gain share again against companies like tea.
Yeah, well this is an area where I mean this is the core of it in many ways and.
No. It represents about half of the company's total revenue.
Both.
789 years ago, we retooled the entire investment portfolio of the company from an R&D.
And from a go to market perspective, just focus more intensely.
On B to B applications.
Industrial has been the priority there. So I think what we're seeing now is the benefit of the new product crop that we've been able to introduce there we have a lot of exciting new things coming that are in the pipeline that are on the cost.
Of materializing into revenue. So I'm also our customer engagements are continuing to evolve.
From I would say 789 years ago, we were largely the component provider now we're providing.
Different forms of solutions collections of components Morse highly integrated products for different types of applications.
So I think in many many ways what we're seeing though is the culmination of many many years of very targeted activity to become stronger and industrial Mitch I might just add that remember. This this particular market is very sticky so the the momentum that we have.
As Vince talked about has taken several years to build and once you have it you kind of roll with it and I would expect to see that continued strength versus the broader market to play out over the over the coming years.
Okay perfect. Thank you very much.
Garnette color Sheriff list.
Our next question comes from CJ Muse Evercore Your line is open.
Yes. Good morning, Thanks for taking the question can you talk in great detail on the Dms side I was hoping just to follow up there as you think about increasing technology requirements within the portfolio and how you're investing in proceeding there I guess two questions. One I think it's about 5% of revenues today, where do you think that can be five years from now and then two how are you seeing changes in the competitive landscape.
As as we proceed both electric vehicles and hybrid from here.
Yeah. Thanks Suji.
First and foremost we're playing.
The high end.
Our portfolio of target Thats kind of mid to high end.
Applications, where the problems.
We're able to leverage our strengths and precision signal processing.
That really has been the main stay of the company for the last five decades.
I would say in terms of what you can expect in terms of growth.
My sense is this will be a double digit growth area for several years to come.
Great and I guess as a follow up for Scott.
At what point in terms of outstanding debt would you focus on 100% of your free cash flow on on buybacks and dividends as opposed to paying down debt.
Yes, hi, good good question TJ I guess.
I don't want to I don't want to lock us into a specific.
Position, but I will say a couple of comments. One this is a business that generates a tremendous amount of cash flow so compared to how the company was run several years ago. We are very comfortable with debt on the balance sheet and I don't see it ever moving to kind of the the large cash surplus that we used to be.
What is where we're really focused on maintaining that investment grade rating. So we're going to be mindful of what the broader interest rate environment looks like and how the ratings agencies view us to ensure that we're doing what's necessary to kind of maintain that investment grade now having said that.
We're going to throw off a lot of cash a we just did a re fi had to create a quarter ago, where we moved some of our our five year term into a into a shorter duration. So expect us to kind of continue moving to drive that sit down and I would highlight that we have been meaningfully taking down our share count to in 2019, I think you can expect us to continue to do that in 2020.
[noise]. Thanks, CJ very helpful. Different next question. Please.
Our next question comes from Craig Hettenbach Morgan Stanley . Your line is open good morning, Craig.
Okay on auto electrification in terms of your positioning and long term growth drivers a number of suppliers have noted just near term weakness in China, just from a subsidy perspectives and uncertainty around demand and any color that you have in terms of what you're seeing in the truck China market on a near term basis.
Hey, Greg Yeah, I mean, we put in the market, we have market leading position across all three all kind of the big market for us on what I'll say is yes last quarter, we did grow year over year, but it was less than than Twoq from BMS, we still did grow but its a lumpy deployment base business. If you look over the over the year to date run double digits, and we expect to grow year over year again in our in our fourth quarter, even with what's going on in China.
And Craig maybe reiterate the prepared remarks that Vince mentioned for US. It is much more than just about managing the battery as efficiently as possible we enjoyed growth with the.
Processors, who form and test the batteries are we have the LTC capabilities that help drive efficient use of that power to to help extend the range and we're also in the charging station. So as the whole ecosystem continues to build out to support the electric vehicles for us it's a much bigger play than just focusing on the batteries.
All right understood. Thanks for that incremental color, yes, I guess the follow up to Sean just on the manufacturing and some of the things you're dealing with the footprint consolidation any update in terms of gross margin impact of the one you would expect to see some synergies from that.
Yeah. Thanks for the thanks for the question Craig So as a as I mentioned in the prepared remarks to our inventory is a little bit higher this quarter. Because we are starting to put the bridge inventory that's necessary for us to be able to close the facilities in Singapore in California. So we'll need that bridge inventory. So that we can continue to serve customers. While we take those facilities down we are targeting a those savings to start coming through the PML in 2021 early 2021 and that as we have been public in several calls that should be a about an incremental $100 million on a run rate basis, that's all flowing through cost of goods sold.
Great. Thank you.
Thanks, Craig next question please.
Thank you. Our next question comes from the fact that our yes from bank of America.
Your line is open.
Thanks, Good morning, the back.
Okay back we're going to go to the next caller.
Thank you. Our next question comes from Stacy Rasgon.
From Bernstein Research your line is open.
Good morning Stacy.
Let's start with Opex. So obviously, you mentioned being a little more constrained on expenses given the environment.
Can you talk a little bit about how you see that opex trajectory going into Q4 are you sort of bottomed at this point, given where variable comp is on on the metrics or is there room to still take opex down.
I guess what are the implications for opex, given the continued weak environment that you're seeing.
Yes. Thanks for the question Stacy So I think the way to.
First as a reminder, we don't we don't guide to gross margins anymore, and if I answer Opex question I am implicitly, giving you that guidance, but qualitatively, yes. The way to think about it is a we are where oh, we have made a meaningful reduction in our opex versus our Q2. So we had a sequential improvement going into Q3, we're looking for for that to kind of carry a roughly flattish for a for the fourth quarter.
We will focus on on the variable cost that we can control and.
Continue to exercise Opex discipline as we've said before one of the the leverage we do have.
Is our compensation system, which which is meant to act as a flywheel.
As of businesses go up and down in that.
We will certainly be an element of the Q4.
Got it thank you.
I I do thanks, so in the prepared remarks, Vince mentioned that obviously the macro environment is still challenging isn't getting better in the near term what do you see those if it's from your perspective versus where your expectations were three months ago have things got worse versus where your prior expectations had been.
I guess, just where we're worried you've been expecting things to kind of go in into the into year end and our things worse than that or they sort of similar to where you would expect them to be three months ago, yes, things that I'd say.
The uncertainty in the trade tensions between America, and China, Obviously, ratcheted up I think its indeterminant.
What will actually happen there in the short to medium term.
You know PEO my.
Indices as well as a GDP are falling somewhat so I think you know that headwind has increased somewhat I think since the last quarter.
You know I think when I when I try to.
Classify how customers are thinking about the world you know the the world of technology is gearing up there's more and more innovation. The R&D budgets are very very strong across the globe and all the sectors.
So I think customers remain optimistic about the future, but I'd say right at this point in time.
The you know the people who commit the capex commit the investments are probably a little less optimistic about the future than they were say a quarter ago. So.
That's pretty much the Oh, the best commentary I can give you space.
And I guess in our conference at the end of May Vince you would temper pretty positive about potentially getting a trade deal. It doesn't sound like were there anymore.
Well, it's you know who really knows you know I think.
Both sides are working on I think incidentally, both sides want them to you, but I think it depends on the conditions and.
You know what what's out there in the public domain is that a you know both sides are digging their heels in at this point. So yes, I'd say they should answer your question directly you know the the sense of a trade deal by the end of the summer, which is looming very quickly here is.
Is less likely than it was when you and I spoke back in the in May.
I see thank you for the three months you guys. It's nothing there and we're going to try to go back to back if we can now be our last question today.
Okay. Your next question is from.
Hi, Rob.
Bank of America. Your line is open.
Hi, Thank you can you hear me now.
We can't do that.
Okay. Thanks.
That's not that far so first question, how should we think about seasonality going into your January .
Corner historically, it it's a positive quarter, but I know you've had some jewelry volatility and this time. There is also the Wally and trade water opportunities I'm. Just curious how do you have visibility kind of one quarter out right now.
[laughter] I'll say typical seasonality I would say is not typical time I'll caveat with them, we're not giving guidance for a quarter out typically first quarter is a weaker quarter for us and b to B industrials typically down automotive typically down I do think and then on the comps market, we talked about it being weaker here in the fourth quarter, but very volatile and I think you see a quick celleration back there in the first quarter and consumer will update you on next call kind of our outlook for 2020, but even if that continues to be down again in 2020, but to a lesser degree than 19.
Hi, Paul.
Then the other yeah. Thank you.
The other thing when I know.
There is a lot of macro uncertainty right now, but when I look at your automotive and industrial business. There. So they were down kind of 6% year on year for the last couple of quarters. If I look at the guidance, you're giving front October that's down about I think about 2% year on year and you are saying industrial can be actually flat.
Add on here, which is much better than what we have seen in the last few quarters I am just trying to reconcile all the uncertainty in the macro environment versus the October quarter kind of industry.
Outlook.
That seems.
Somewhat more positive.
When I look at it.
Yeah, we have a couple of specific areas, where we're seeing strength aerospace and defense been kind of top of the list. There you know for.
A range of reasons, it's a combination of.
But just seeing increase in the area of aerospace and defense and also the strength of the technology portfolio that we bring.
I mentioned earlier on the healthcare continues to grow for the company. It's an area again, where we've been increasing investments over the last.
Slide seven years.
That's an area that.
I continue to be very optimistic about and think it will be a very good source of growth for the company for many many years to come. So there there are the two areas that that.
Our most meaningfully contributing on the industrial side right now to two is the strength, we're seeing relative to the market.
And with that kind of I know you asked specifically about the about the change in trajectory in in Q4, but I wouldnt want to remind you that kind of on a year to date basis. Those numbers you quoted have been substantially better than the broader market. So we have outperformed.
Although the industrial market has it has been down on a year to date basis for us and we.
Generally outperformed the broader market.
Yes, absolutely okay. Thank you.
Thank you Rebecca thank everyone for joining us this morning, I caught the transcript will be available on our website and all of our reconciliations. The information also be found there there's again for joining us and look forward to talking to you in 90 days.
This concludes today's analog devices conference call.
Okay.
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