Operator:

Good morning, and welcome to the Analog Devices' Second Quarter Fiscal Year 2024 Earnings Conference Call, which is being audio webcast via telephone and over the web. I'd like to now introduce your host for today's call Mr. Michael Lucarelli, Vice President of Investor Relations and FP&A. Sir, the floor is yours.

Vincent Roche:

Thank you very much, Mike. Good morning, and a big welcome to you all. In the second quarter, a strong focus 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, 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. 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. With that framing, 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. 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. 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. In industrial automation, the growth of the digital factory is accelerating upgrades to higher bandwidth, deterministic industrial Ethernet that can support up to 10x 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 automotive. 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. The increasing content per vehicle is a pervasive trend across all vehicle types’ combustion 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 OEM, who intend to deploy our high performance, high bandwidth connectivity solution across a larger share of their fleets. We've also seen strong attach for functionally safe power, which is used with sensors and displays in ADAS systems and recently increased share 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 launches, and two manufacturers intend to deploy our higher content wireless solutions starting next year. 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. 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 to 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. 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 hyperscalers. 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. Power efficient computing though is just one challenge the AI ecosystem faces. Data must also be transported efficiently, securely and at much, much greater speeds. 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 differentiator. 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 industrial, 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 test. We are working with key players globally to enable faster digital scan speeds, higher channel density and the improved energy efficiency necessary to scale production of AI systems. 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. 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. Let me share some examples of how we are working to amplify the second wave. For example, in acoustic systems, we are combining our application specific algorithms with ultra-low energy processing hardware to enrich our audio platform offerings. We are 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 capabilities to enhance our advanced connectivity platform 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 to give customers the ability to solve their linearization challenges in a fraction of the time. In 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. 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 portfolios. In short, ADI's AI future looks bright across the continuum of sensor to cloud. In closing, I'm very proud of how our team has executed in one of the largest downturns the semiconductor industry has seen. More importantly, I've never been more excited about how we are positioned for the future and what it holds for ADI. With that, I'm going to hand it over to Rich.

Michael Lucarelli:

Thanks, Rich. Let's get to the Q&A session. We ask that you limit yourself to 1 question in order to allow for additional participants on the call this morning. If you have a follow-up question, please re-queue and we'll take your question if time allows. With that, we will have our first question please.

Tore 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 end market demands, inventory replenishment and if there's any sub-segments within industrial that's driving that outperforming growth?

Vincent Roche:

Yes. I think one other piece of color, Tore, is that, the obviously, the aerospace and defense business is doing well. We've a lot of high prospects for that over the coming years. But I think, in general, geographically, it's been on the upward in terms of demand and across most of the segments, and particularly the ones that Rich pointed out.

Operator:

Our next question comes from the line of Stacy Rasgon from Bernstein Research.

Michael Lucarelli:

Yes, sure. It's actually good question. It's above one in all end markets. Not all applications within end markets are above one though. And if you think about the shape of that bookings throughout the quarter, we talked about last earnings call, bookings improved. It started below parity and exit 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 one. You can think of some instrumentation, some automation, some aerospace and defense within industrial. Broad-based improvement in bookings across all market geographies is really the main takeaway.

Toshiya Hari:

Hi. Good morning. Thank you so much for taking the question. I wanted to ask about the back half of the calendar year and how you're thinking about the shape of the recovery. Vince, you've lived through many cycles. I think typically the same way we underestimate the magnitude of the pace of the downturn, we collectively underestimate the pace of the upturn. 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 something materially different in terms of the shape of the upturn? Thank you.

Operator:

Our next question comes from the line of Vivek Arya from Bank of America Securities.

Vincent Roche:

Yes. Look, I think it's very hard to answer that question, simply because when history is written, we're going to get the average of what's happened pre-pandemic and post-pandemic. There's been so much ringing in the system, demand overshoot and then demand undershoot. But my sense is, certainly from our perspective, I think we are very well-positioned to be able to capture the upside if things grow faster than we expect. We have got a lot of inventory on the balance sheet. We've kept inventory closer to ADI less downstream. We've got as well a tailwind here from AI, which I think is going to be a multi-year tailwind. We have got that pushing us along. But at the same time, still we've got high interest rates, we've got still relatively high inflation in many places. I think ultimately the size of the recovery and the pace of the recovery will have a strong economic and geopolitical tone to it. But, overall, my sense is, we'll see good growth for the remainder of this year and strong growth in 2025. Beyond that, 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 and each of our segments. 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. But 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 is at, we are in a recovery phase.

Vivek Arya:

But that's Quantification, right, of what the sell through has been in the reported quarters year-on-year?

Operator:

Our next question comes from the line of Christopher Danley from Citigroup.

Richard Puccio:

Sure. I'll take that one. From a gross margin and utilization perspective, we talked a little bit about this in the first quarter 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. Specifically for Q3, we anticipate gross margin a bit above 67%. Looking from here, gross margins expansion is going to be dictated by continued revenue growth, mix of business and utilization. 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 lesser amount than in Q2. Overall, we 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 that's been super helpful in protecting us in this trough is the flexibility to swing capacity back into our fabs to help to maintain utilization. We've done that effectively, which is why we called the floor on utilization. I expect that utilizations as the demand continues to increase will start to increase and aid in our margin expansion. From a channel, as Mike mentioned, from a channel perspective, our goal was to reduce by $100 million we achieved. We will reduce an additional amount in Q3 to a lesser degree. Ultimately, we expect that this will get us firmly back into our target range of seven to eight weeks of inventory in the channel.

Operator:

Our next question comes from the line of Ross Seymore from Deutsche Bank.

Vincent Roche:

Thanks, Ross. We've always acquired assets that get ADI ahead of customers' needs. We tend to take a long-term view, get ahead of our customers' needs. 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. 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. Those are areas where as the world becomes more and more software defined, that is clearly an area where ADI has been organically investing. We've done some more tuck-in type acquisitions as well that help us in that area. But I think right now, we are really focused on making sure that, we fully capture all the synergies, from the revenue synergies from Maxim. But we're always looking, by the way. We're always looking for assets. But clearly I think analog is complete and it's other areas we're now looking.

Mark Lipacis:

Hi, thanks for taking my question. Vince, it's for you, I think. If you look at your -- if you adjust your revenues for the step function increase that you had for pricing, it looks like on a unit basis, you're shipping 25% below the trend line. I don't think you shipped that far below your long-term trend line since the world financial crisis. At the same time that's happening, you talked about your customers lowering, the supply chain lowering inventories, you are lowering inventories. It seems like there's a real risk that the industry is setting up for you and the industry is setting up for like a really tight supply environment, maybe even as they're early as the end of this year or early next year. I'm wondering, how do you think is there a risk that we enter that kind of a scenario? It seems like your customers never learn about trying to get their inventories right and the order see you on time. Is there something that's changed in your operations that will enable you to adjust to that, 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?

Operator:

Our next question comes from the line of Harlan Sur from JPMorgan.

Michael Lucarelli:

Yes, Harlan, it's Mike. Yes, the direct order we talked about our -- 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 imaged directly to our end customers. So yes, it's not about -- we're not growing because the channel is refilling. We're growing because there's real demand out there on the end market level across all of our markets.

Michael Lucarelli:

Did that [indiscernible] to your question, Harlan?

Michael Lucarelli:

We'll go to our last question, please.

Joseph Moore:

Great. 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 -- as you said you would, in a very difficult trough, you're troughing for the full year, probably above 40%. So that's pretty good structural improvement. Can you talk about that, what's going on if you sort of look over a decade, why is your through-cycle margin profile going up so much?

Vincent Roche:

Yes. I think, Joe, as well, in addition to what Rich has said, it's important to point out that, first and foremost, we're innovation-centered, and if you look at the vintage bands 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. 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 -- that's the origin, if you like, of the margin story for ADI. Our diversity helps us a lot. Our franchise isn't as price-sensitive as many. And as I said earlier, the life cycles matter. When we get 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 whereas Moore's Law kind of taught everybody that we could give back a lot of the value that was generated in prior years, in the New Year. That has stopped. We asymptote roughly to zero now. We don't give price away. We compete for sockets, computed innovation, but that is really the origin of ADI's margin story.

Operator:

This concludes today's Analog Devices conference call. You may now disconnect.

Operator:

Good morning and welcome to the Analog Devices’ First Quarter Fiscal Year 2024 Earnings Conference Call, which is being audio webcast via telephone and over the web. I'd like to now introduce your host for today's call Mr. Michael Lucarelli, Vice President of Investor Relations and FP&A. Sir, the floor is yours.

Vincent Roche :

Thank you very much, Mike, and good morning to you all. But before I begin, I'd like to welcome ADI’s new CFO Richard Puccio to the call, which is only a few weeks in, but we're very excited to have him on board. He brings tremendous financial experience and capability from complex technology sectors, which I think will be very valuable, as we continue to extend our leadership in the Intelligent Edge era. I'd also like to recognize Jim Mollica for serving as Interim CFO and thank Jim for his continued partnership and contributions to our success. Now on to the results for the first quarter. ADI delivered revenue of more than $2.5 billion, operating margins of 42% and earnings per share of $1.73, all above the midpoint of our outlook. As we previously discussed, the inventory rationalization that our customers that began during the middle of 2023 is expected to continue through our second quarter. Encouragingly, first quarter bookings improved sequentially, growing our confidence that inventory related headwinds will largely subside this quarter. That said, the macro situation remains challenging, and the shape and timing of a second half recovery will be governed by underlying demand. Importantly, the strength of our balance sheet, operational agility, and prudent capital management are serving as well during this downturn. We've invested heavily in R&D, customer engagement, activity and manufacturing resiliency, fueling our future growth, even as we maintain the industry leading profitability that supports our practice of robust capital returns. To that end, I'm pleased to highlight that we announced the 7% dividend increase yesterday, making 2024 the 20th consecutive year of higher dividends for shareholders. Now, digging a little deeper into our investment philosophy, we continue to focus on anticipating our customers’ future needs. And what's becoming a software-defined AI-driven world leveraging pervasive sensing, Edge computing and ubiquitous connectivity. The technological complexity facing our customers is compounded by their need to deliver solutions that are both secure and extremely power efficient. So let me share a little more now about how we are strategically allocating our capital to deliver more solutions value to our customers, and further support their confidence in the long-term supply assurance? Since our acquisition of Maxim, we've increased our engineering population by around 10% complementing our world class Analog talent, with increasing levels of digital software, AI, and systems expertise. This breadth of engineering gives ADI the capabilities to tackle more of our customers' challenges, and grow our sell-in across markets. In addition, as our engineers increasingly work shoulder to shoulder with our customers to co-architect their solutions, we further deepen our understanding of their technological and market complexities. This strengthens our ability to deliver increasingly stronger innovation from components to physical Edge systems. And I'd like to share now a few examples of what I mean. For example, in the industrial sector, digital transformation is driving investment in Edge-based connectivity and control platforms that enable secure power efficient monitoring and control of automation systems. Last month, Honeywell announced it will use ADI's Deterministic Ethernet and software-configurable IO solutions across their factory automation and building management offerings. Our portfolio enables customers to securely deliver end-to-end signal integrity between the Edge and the cloud in a power efficient and highly flexible platform configuration. This system approach enables us to capture three times more value, and we expect additional design wins due to high customer interest globally. In the automotive sector, we've aligned our business to the second are trends of electrification, advanced safety systems, and immersive digital in-cabin experience. For example, our Gigabit Multimedia Serial Link or GMSL Solution continues to gain broader adoption, as customers seek to extend high performance data and video capabilities across their fleets. We’ve recently increased our share at a top three global auto manufacturer extending our position across all their brands and quintupling our GMSL opportunity at that customer. In datacenters, AI and machine learning computing systems require orders of magnitude more processing and thus energy, compared to traditional workloads. Our portfolio of high-performance power and protection solutions, specifically designed for vertical power delivery is helping customers re-architect their datacenter systems to improve power delivery and system performance. Last quarter, we secured a significant design win from a large hyperscale customer for our multiphase vertical power solution that reduces power losses by 35% when compared to conventional ones. In Healthcare, this market continues to digitalize to enable more predictive and preventative treatment regimens. ADI has been on the forefront of this transition, and I'm pleased to let you know that we've recently received FDA clearance for a non-invasive remote monitoring platform, that enables home-based management of chronic diseases such as congestive heart failure. This solution leverages our deep domain expertise, leading-edge capabilities across signal processing and sensor modalities, and unique algorithms that enable medical providers to act early, precisely and effectively. As a platform, this also allows us in the future to use our data-driven AI algorithms to make this even more personalized. This advance unlocks a new growth vector for ADI, adding more than $5 billion of new sell-in. Switching now to the evolution of our supply chain, I'd like to share some of our progress in manufacturing resilience, which is a growing priority for our customers. Over the last two years, we've invested record levels of CapEx to expand our capacity and to enhance resiliency. Now with line of sight to achieving our goal of doubling front and back-end internal capacity in 2025 and will begin to significantly reduce our capital spend. Notably, approximately 10% of our investments have been focused on implementing more efficient systems that will deliver sustainability benefits, including greatly reducing input resources and emissions, which, overtime, will also lower our operating costs. These investments enable a more flexible hybrid manufacturing model and will increase our swing capacity to around 70% of revenue in the coming years. This unique ability helps to capture the upside in strong demand backdrops and better protect our gross margins during more challenging times. Complementing these organic investments, we also extended our foundry partnership with TSMC to secure additional 300-millimeter fine-pitch technology capacity at their Japan subsidiary. Our investments, combined with the support of our foundry partners will enable us to manufacture our products in multiple geographic locations, enhancing our resiliency and giving our customers greater optionality and assurance over their supply chains. So in closing, as always, we're keeping one eye on the present and one eye on the future. I have confidence in the steps that we're taking to preserve our capital and navigate the near term challenges while ensuring that we make the necessary investments to increase our competitiveness and accelerate our business in the future. And so with that, I'd like to pass the microphone over to Rich.

Michael Lucarelli :

Thanks, Rich, and welcome to the call. Let’s get into our 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 follow up question, please requeue, and we’ll take your question if time allows. With that, we have our first question, please.

Joseph Moore :

Great, thank you. You guys are guiding down now mid-30% year-on-year. If I go back to historic drawdowns, you haven't seen revenue fall that far other than 2001, 2009, where we had kind of significant demand destruction. So it kind of looks like the worst inventory correction maybe we've ever seen. Can you just talk to that? Does that reflect how much inventory excess there might have been? Or just any kind of sense check as we approach the bottom as to why the downturn looks kind of severe?

Michael Lucarelli :

Thanks, Joe. Operator, next question please?

Stacy Rasgon :

Hi, guys. Thanks for taking my questions. Rich, I was wondering if you could give us a little more color on the segment guidance next quarter. I know you said everything down in industrial worse. But I mean like industrial has got to be down probably more than 20% sequentially, and that would probably still assume everything else is down double digit sequentially. Is that what you have in mind? And any further color you could give us would be great.

Stacy Rasgon :

Yeah.

Operator:

Thank you. One moment for questions. Our next question comes from Chris Danely with Citi. You may proceed.

Michael Lucarelli :

Sure. I'll start and then I think Vince will add some clarity also on it, but this really is a supply-driven demand correction, what you're seeing here. And Vince outlined that in the answer to the first question where the supply chain fracture lead times extended for an extended period of time. Those have normalized. We're still seeing what are happening as our customers is, they build a lot of inventory over that time. Why our lead times are extremely long. Now our lead time is back to normal, so they're seeing them reduce their balance sheet inventory to match our short lead times, so the cycle times match up. So really also a majority supply chain some demand. There's some areas of pockets of weakness in demand. But really overall, I'll call it more of a supply than demand correction in our business. And we talked about in the script and as well the press release that supplied normalizing here in our second quarter.

Chris Danely :

All right. Thanks, guys.

Operator:

Thank you. One moment for questions. Our next question comes from Vivek Arya with Bank of America Securities. You may proceed.

Vincent Roche:

Yeah. Well, I think, look, as soon as demand in flex, and we get back into a more normalized growth pattern, Vivek, everything will improve. Our utilizations will improve. We have under-shipped the channel, we've under-shipped our customers. So we've been working very, very hard in the company to make sure that when demand and flex that we will get a -- we've got the supply in place. We've got lots of finished goods and deadstock inventory. So we're in a great position to address the recovery. On the first part of your question about where are we seeing the bookings improvement, pretty much everywhere, pretty much everywhere, across all the segments. And if you look at industrial, I'd say the two healthiest parts of industrial right now is, as we message to the external world, aerospace and defense and healthcare, they've got fundamentally quite different drivers to, say, the factory automation or instrumentation business. But those two sectors are holding up better than the rest. But even in a more traditional industrial sector like instrumentation, all of these new high-performance computing systems need you test equipment, so that benefits ADI. So I think, in general, it's true to say, maybe with the exception of our wireless business, most sectors are seeing a return to a more normalized bookings pattern.

Michael Lucarelli :

And Vivek, as you asked a three-part question, I'll chime in as well for third quarter outlook. I know you gave me the outlook question. So it's hard to say, right? Our lead times are 13 weeks are lower. So we don't really have visibility into the third quarter today. But if you look back over history over the past decade, our B2B markets are about flattish sequentially in 3Q from 2Q, sometimes they're up a little bit, sometimes they're down a little bit depending where you are in the cycle, while consumers start seeing some holiday builds kind of up mid- to high single digit sequentially. So that's kind of historical context. We're not guiding in the third quarter, but that's how we should frame it. And then to add on to what Vince said about bookings. Bookings actually increased last quarter, and the quarter before that. So 4Q and 1Q bookings both improved. And what's interesting now is you look at our bookings, they're approaching parity, which is a good sign that we just see a pickup in the back half of the year.

Operator:

Thank you. One moment for questions. Our next question comes from Harlan Sur with JPMorgan. You may proceed.

Michael Lucarelli :

So if you take a step back from a geo perspective, whole regions are weak, North America, Europe, China. China has been weakest the longest, I would say. The rest of Asia is doing better than the big three, but still weak as well. And like I said, China is the weakest source of demand. Around Chinese New Year, honestly, if there's something unique about it, we called out. But I think what Vince said in the last question basically was bookings are improving globally as well as in China before and after this year. So really no impact from Chinese New Year and kind of the commentary we've made.

Operator:

Thank you. One moment for questions. Our next question comes from Toshiya Hari with Goldman Sachs. You may proceed.

Michael Lucarelli :

I'll grab the first part of that on the sell-in and sell-through part of it, Toshi. So selling and sell-through really relates to the channel. We reduced our channel inventory dollars the past two quarters, I would call it around a $50 million reduction, plus or minus per quarter over the last two quarters. Looking at embedded in our guidance is a much bigger reduction of channel inventory. If you want to put a number around $100 million or so in our outlook, that's probably what we're seeing on the channel side. So we're reducing a lot in the channel. Now as you look at the back half of the year, from a channel perspective, we think the sell-in and sell-through should be better matched given the actions we've taken over the last three quarters. And I'll pass it to Vince to talk a little about the customer inventory situation on the end customer side.

Toshiya Hari :

Great. Thank you.

William Stein :

Great. Thanks for taking my questions. I want to welcome, Rich, but direct a couple of questions to Vince, please. Vince, the more vertical capabilities that you talked about, it sort of suggests that you're needing to either partner more closely with a smaller number of customers or maybe you wind up pushing somewhat into their capabilities and are potentially competing with some of them. And I wonder how you contemplate managing that dynamic?

William Stein :

That helps. If I can ask a follow-up. You talked a bit about AI. It's sort of a familiar topic to us lately. Maybe too much so.

William Stein :

There's a narrative here where there are some creative capabilities, in fact, I would say, engineering-focused capabilities that maybe made more efficient or productive with Generative AI. In a world where the story about Analog design engineer capability being so limited and that driving a significant advantage for ADI. I wonder if that story changes at all because of this capability. Have you started using this for circuit design? Or do you anticipate that it could be used by others, either competitors or customers? Thank you.

William Stein :

Thank you.

Operator:

Thank you. One moment for questions. Our next question comes from Timothy Arcuri with UBS. You may proceed.

Michael Lucarelli :

So I think your question is on how much of the impact on our gross margins underutilization versus mix. I think if you look here, our peak gross margins were about 74%. Our outlook, as Rich pointed out, embeds about 67%. That decline is really mix and utilization, about equal parts, I'll call it. As you look to the back half of this year, it depends what mix is going to do. I think industrial is bottoming here, so that should help a little bit. From a utilization standpoint, Rich also pointed out, our starts are low enough to reduce inventory meaningfully. We've been doing that. We'll do it again in 2Q. So I don't see it starts going down, they're probably start going up, which should provide a tailwind to gross margins. How fast the gross margins pick up really depends on those 2 factors, how fast the revenue picks up and how much of it relates to the industrial sector.

Michael Lucarelli :

So from inventories, yeah, I would say, a good question. You're right. We have a lot of inventory. As you can see on our balance sheet. The -- there's no acceleration of inventory charges in our gross margins. The inventory charge from a reserve standpoint have been elevated for the past few quarters, and they probably stay that way as you go into the back half of this year into next year. But that's not a headwind anymore. It's already kind of built in the run rate.

Michael Lucarelli :

We will go to our last question, please.

CJ Muse:

Yeah. Thank you for taking the question. You talked about auto being down sequentially, but seeing, I guess, the best performance out of all the different segments. Curious if you can kind of walk through what you're seeing from Tier 1 auto correction and whether you think that will be completed exiting April as well? Thanks so much.

Vincent Roche :

All right. Thank you, CJ. Thanks, everyone, for joining our call this morning. A copy of the transcript will be available on the website. Thanks for joining us, and have a great rest of the day.

Operator:

Good morning and welcome to the Analog Devices Fourth Quarter Fiscal Year 2023 Earnings Conference Call, which is being audio webcast via telephone and over the web. 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.

Vincent Roche:

Thank you very much, Mike and a very good morning to you all. Though the industry is obviously moving through a more challenging period of the business cycle, I am very pleased to share that we are preserving the strength of our financial performance while preparing for the market’s recovery. Fourth quarter revenue was $2.7 billion, led by double-digit year-over-year growth in our automotive sector. The combination of careful expense management and our employees’ commitment to high standards of execution enabled us to deliver operating margins of 44.7% and EPS of $2.01 for the quarter. For the fiscal year, ‘23 again set new high watermarks with revenue reaching $12.3 billion, supported by all-time highs in the industrial and automotive sectors. This resulted in EPS of $10.09 up 5% from a year ago. Notably, we returned a record $4.6 billion to shareholders in 2023, exceeding our 100% free cash flow return target. Since the closing of Maxim just over 2 years ago, ADI has returned roughly $12 billion to shareholders or nearly 15% of our market cap. Over the same time, we have reduced our share count by more than 6% and increased our dividend per share by 25%. Now looking to fiscal ‘24, the near-term dynamics remain uncertain. As you will recall, last quarter, we outlined a broad-based inventory correction across all markets and geographies, reflecting the deteriorating macro conditions and our improving lead times. Consistent with our view 90 days ago, we expect the customer inventory overhang to persist through the first half of the year. Challenging times like these confirm the wisdom and the strength of our business model. The diversification of our business across customers, applications and products helps to limit volatility while preserving profitability. Building upon that foundation, we took actions to better ensure we can deliver operating margins in the low 40s and solid free cash flow despite the revenue decline. Importantly, however, we are not simply battening down the hatches. Our resilient financial model enables us to continue making the strategic investments necessary to allow us to capitalize on the upside when the business inflects higher. That longer term focus and commitment is why our customers have the confidence to increasingly depend on us as a key strategic partner. I have been very heartened by my conversations with customers across many markets and geographies over this past quarter. Despite the near-term challenges, they share our optimism that the intelligent edge is enabling a future replete with opportunity, and they are clear about the expanding role that they expect ADI to play in their success. Our customers’ optimism is reflected in the continued expansion of our design win pipeline, which increased by double-digits again in 2023. That growth was enhanced by sustained momentum in our Maxim revenue synergies pipeline, which is tracking ahead of our initial expectations. We expect synergy-driven revenue acceleration in 2025 putting us on a path to achieve our goal of more than $1 billion in revenue synergy by 2027. The combination of our strong design win growth with recurring revenue streams from our 75,000 product SKUs, which have average life spans of a decade or more creates a business with high barriers to entry that’s both resilient and rich with growth opportunities. Now, let me share some examples of recent wins with you. In Industrial Automation, we are increasingly delivering more complete solutions. At a top digital factory automation supplier, for example, we have recently leveraged our anchor position in software configurable I/O to attach additional solutions value across power, isolation and connectivity. As a result, we captured 3x the bill of materials and secured design wins across their entire platform. In Industrial Instrumentation, we have increased our design wins at SOC and memory test market leaders. Our next-generation solutions increased channel density and throughput while reducing energy consumption by up to an incredible 30% per system. These are critical parameters for testing complex, high-performance compute GPUs and high-bandwidth memory for artificial intelligence systems. Looking now to automotive. In electrification, momentum continues for our wireless battery management system. This novel solution enables lower weight, greater scalability and improved manufacturing productivity, driving down the total cost of ownership for our customers while increasing ADI’s content. Last quarter, we secured our fifth customer, a top 10 EV OEM. We’ll begin to deploy our wireless solution in their next-gen EVs in 2026. Now furthermore, during the year, ADI reinforced our industry-leading position in automotive, high-performance functionally save power. To that end, we won next-generation power for ADAS systems at four top suppliers this past year. These wins add another growth vector to our automotive franchise, which has benefited from strong momentum across electrification and in-cabin connectivity. This proliferation of ADAS is benefiting our high-speed GMSL connectivity portfolio. GMSL has been one of our fastest growing areas and a major revenue synergy generator for us. In the last year, we were awarded 4 new wins across leading North American, Asian and European OEMs. We are also expanding our opportunity and increasing our ROI, winning multiple design wins in industrial areas – in adjacent areas such as autonomous robotic systems. Our cloud infrastructure business is beginning to benefit from the power challenges and connectivity requirements necessary in AI ML systems. Notably, a large hyperscaler designed our high-performance power and protection solutions into their next-generation AI platform. And in connectivity, systems are upgrading now to 1 terabit per second and require our highest level of precision control solutions to efficiently support the growth in data generation. In consumer, we won multiple power management sockets in a portable application and a key customer. These wins truly show the combinatorial power of our acquisition strategy. We leveraged our industry leading cell and switcher, Maxim’s cost optimized process technology, and our customer relationships to secure these wins. And lastly, in healthcare, Maxim strengthened our comprehensive suite of technology for personal monitoring solutions, adding sensor AFEs, microcontrollers and ultra-low power technologies. We secured a design win at a leading continuous glucose monitoring customer this year. Our solution increases the robustness, accuracy and power efficiency of their glucose center, thereby helping to extend its life from days to weeks. So in summary, we’re proud of another year of record revenue and earnings. We continue to demonstrate the power of our business model, which delivers results through all phases of the business cycle. Our continued strong investments in technology and business innovation, customer engagement, and our hybrid manufacturing model positions ADI and our customers to take maximum advantage of the opportunities at the intelligent edge when the business recovery arrives. Now I’d like to pass the call over to Jim. Over the past 35 years, Jim has taken on a number of critical financial leadership roles across ADI, enabling him to develop a breadth and depth of understanding of our business that very, very few possess. So I’m pleased now to have him on my leadership team and to be joined by Jim on today’s call. Over to you, Jim.

Michael Lucarelli:

Thanks, Jim. Welcome to the call. It’s great to have you. Now let’s get to the Q&A session. [Operator Instructions] With that, we will have our first question please.

Ambrish Srivastava:

Hi, thank you. Thank you very much for taking my question. Vince, it looks like order has been restored in the diversified Analog world with – it looks like a very normal cyclical downturn and with you, what you’ve built is a structurally more profitable company holding to 40% – low 40% operating margin line. My question is on a bottoming process. And I know we’re not there yet, but can you just remind us or help us understand metrics you’re following regarding cancellations, pushouts, backlog, you did talk about cancellations, Jim. And then kind of related to that, is if you look at past cycles, does automotive needs to go down double-digit year-over-year decline as industrial has been there? And how should we think about that? Thank you.

Ambrish Srivastava:

Thank you, Vince.

Operator:

[Operator Instructions] Our next question comes from Vivek Arya with Bank of America Securities. Your line is open.

Vincent Roche:

Yes. Well, I think it’s – Vivek, thank you for the question. It’s one quarter at a time here. What I will say contextually is that we expect the inventory overhang to have been depleted by the start of our third quarter, which is in May of next year. So, we still remain pretty confident about that, given the dynamics that I just outlined. But the other parts of the cycle that we’re really – I think everybody is seeing pressure from is the macroeconomic climate and particularly the decline of semi business in China. So that’s the piece. I mean that is the piece that isn’t well understood. But all that said, the macro will be the governor on what happens in the second half of the year. And I think another quarter or so will give us a lot more confidence in terms of what is possible in the second half. But I will let Jim answer as well give you some particular statistics to underpin our assumptions here.

Michael Lucarelli:

Yes. And it’s very confusing with a 13 to 14-week card, you’re right, Vivek. I’ll kind of add some commentary around that, how to think about that. Normally, 2Q from 1Q and a 13-week to 13-week basis up about 5%. And given what have been said, inventory overhang and bookings getting better. It still feels like we should probably grow some, but I don’t think 5% is likely. Why? There’s still an inventory overhang going on. So if you think 13-week to 13-week were about flattish, plus or minus, in 1Q to 2Q, that’s probably the way to think about it. That means if you include the extra week, it’s probably down about 5% plus or minus sequentially. So I hope that helps back a little bit because it is confusing. And with that we go to our next question, please.

Joseph Moore:

Great. Thank you. I wonder, I mean now that you’re in a revenue downturn that looks more severe than we saw the last cycle, what are you seeing in terms of pricing? And are people – you obviously raised prices during the upturn. Are people asking you to give that back? And is that a different conversation on kind of a like-for-like basis versus approaching kind of new design win activity?

Joseph Moore:

Thank you.

Operator:

[Operator Instructions] Our next question comes from Stacy Rasgon with Bernstein Research. Your line is open.

Jim Mollica:

Yes, Stacy, it’s Jim. Let me take that. Let me the margin one first, and then I will talk about the OpEx for the quarter. There is many inputs. There is many levers to the gross margin. There is revenue that’s priced, there is mix as factory loading utilization levels. And let me just try to unpack that a bit. Vince mentioned on the pricing side, basically, that’s stable. So, that’s not a drag to gross margins as we move forward. On the revenue side, basically, we are down – the midpoint of our first quarter guide on a 13-week basis is down, approaching 30% from our previous peak. So, basically revenue is a headwind for us there. Mix basically is unfavorable as well. As you heard in my prepared remarks, industrial was down 19% and 20% last quarter on a year-over-year and sequential basis, and that will be down again in first quarter. So, mix is a headwind for us. When you put all those puts and takes together, we would expect basically gross margin will fall below 70% in the first half of the year at these trough levels. I think if you think about something in the 68% to 69% range, is probably a good range for this trough revenue range. So, that’s kind of the gross margin. On the OpEx side, as I mentioned, our 4Q OpEx basically was down about $60 million on a sequential basis. This was the combination of reducing discretionary spend and of course, a much lower variable comp. Looking into 1Q, we expect that to be down again even with the extra week. And it’s fair to say that probably you can think about 1% to 2% there. This reduction relates to the actions that we structurally took to reduce OpEx as well as a lower typical seasonal spend in 1Q as well. We don’t guide 2Q, but just to give you a sense there, when you look at 2Q, it’s probably best to compare that to the 4Q, which was a like 13 to 13-week comparison. And when you are looking at 4Q ‘23 versus 2Q ‘24, given some of the structural modest reductions we had made, we would expect OpEx in 2Q to be down a few percent from the 4Q operating levels, so I hope that helps.

Michael Lucarelli:

Thanks Stacy. I always appreciate your two-part and one-part question. With that, next question, please.

Chris Danely:

Hey. Thanks. Just a question on industrial, historically this has been a pretty strong sector for you guys, but it seems like it’s – the revenue decline in industrial is worse than the overall company. Can you just talk about why that is and maybe broader speaking, are the bookings or the revenue falling more because the macro is worse than expected, or the inventory situation out there is just worse than you guys thought? And do you think you will be able to hold that 70% gross margin floor for the fiscal ‘24? Thanks.

Jim Mollica:

Yes. Chris, I think just a couple of points there. Vince talked about at the trough revenue, gross margins in the 68% to 69% range, gross margins at 70% for the year, I think that was the first part of your question as well. A lot of that will depend upon when the demand comes back in terms of – so we don’t really guide for the year, but that’s probably dependent upon revenue coming back to a more normal level. Let me just add a few points, though. We are – utilization levels basically brought them down in 4Q, we are going to bring them down again in 1Q. You see the inventory reduction of $70 million in 4Q, which was a little bit better than I think we guided last quarter, you are going to expect that inventory to be reduced at a similar level in 1Q and again in 2Q. And what we are also doing now is we are activating our hybrid manufacturing strategy. So, we are actually swinging wafers from external back in-house, which moderates the factory load, which gives a little bit of a cushion on that gross margin side as well. So, just a little bit more color as what you can expect for us in the second quarter here.

Michael Lucarelli:

Thanks Jim. With that, next question.

Tore Svanberg:

Yes. Thank you and congratulations on the results in this tough environment. I had a question about CapEx. So, one of your competitors talk about this geopolitical dependable capacity that they are investing in. You are going showed the complete other the way, you are reducing CapEx a lot for this year. Help us understand a little bit what your partners are doing – your founder partners are doing for you to sort of feel comfortable that you don’t have to spend as much in CapEx going forward? Thank you.

Vincent Roche:

I will sort of add some color.

Vincent Roche:

Yes. So, let me – good morning, Tore, let me add a couple of piece of color to what Jim has just said. So, most of ADI’s revenue today is built on process technologies that are 180 nanometers [ph] and above. Now in digital technology terms, that’s a very, very old process technology. That’s more than 25-years-old in terms of its currency. But in the analog space, that is still a very contemporary process node, so more than 70 – a little more than 70% of our revenue today is produced on process technologies at 180 nanometers and above. And as Jim said, we have gone through a major internal expansion to give us more flexibility and agility in terms of where and how we manufacture those process technologies. And we are making all these investments that we have made on the internal fabs of 200-millimeter wafers. So, the tool chains are less expensive, and we are able to get tremendous return on investment over many, many decades on the investments that we are making. So – and I think below that, for the, let’s say, at the final line geometry nodes, we have very, very good alternatives with our external partners who are in a very, very really important piece of how we make the hybrid manufacturing model work. So, anything that is kind of 90 nanometers and below, it’s 300-millimeter wafers, and we secure that production with multiple sources across the globe.

Michael Lucarelli:

Thanks so much Tore. And we will go to our last question, please.

Timothy Arcuri:

Thanks a lot. I had a question on inventory. It sounds like you are planning to bring it down quite a bit from here. And you mentioned that the target is 120 days, but of course, it depends on what the base of revenue is. So, can you quantify how much more you plan to take out of your inventory? It seems like it could come down maybe a couple of hundred million dollars more from here? And then also maybe if you can also quantify – and this is kind of a hard question to answer, but how much is selling below sell-through? I know you get some metrics, particularly inside of distribution? Thanks.

Vincent Roche:

Tim and your question on the days of inventory, I would say our pre-COVID target was 120, we are close to 190 today. I think both of them are going to be wrong when all the dust settles, but we will re-up you on kind of the long-term inventory days model at a future call. And with that…

Vincent Roche:

Good Tim. Thanks everyone for joining us this morning. A copy of the transcript will be available on our website. Thanks for joining the call. I appreciate your interest in ADI and have a great Thanksgiving.

Operator:

Good morning, and welcome to the Analog Devices Third Quarter Fiscal Year 2023 Earnings Conference Call, which is being audio webcast via telephone and over the web. I'd like to now introduce your host for today's call, Mr. Michael Lucarelli, Vice President of Investor Relations and FP&A. Sir, the floor is yours.

Vincent Roche:

Thank you, Mike, and a very good morning to you all. ADI executed well in the third quarter and delivered results within our expectations despite the challenging operating environment. Revenue was nearly $3.1 billion, led by growth in our Industrial and Automotive markets once again. Gross margin remained strong, above 72%, operating margin was nearly 48% and EPS was $249 million. This continued profitability reflects our portfolio's resilience as well as the innovation premium that it commands. I want to turn to the current business environment now just for a moment. As we shared last quarter, we believe we're in a period of customer inventory reconciliation following three consecutive years of steady growth. Through our customer conversations, it's evident these accelerating inventory adjustments relate to the weakening macro backdrop and ADI's rapidly improving lead times. Importantly, we believe we shipped below end market consumption in the third quarter and expect to do so again in the fourth. This will help normalize our customers' inventory more quickly and position us to return to growth more quickly in the coming quarters. Stepping back, while near-term dynamics or turbulence, our long-term confidence remains undiminished. Over the last several decades, we have enhanced the resiliency of our global business, defined by our diversified customer and product portfolio and flexible hybrid manufacturing model. This enables us to ensure softer demand periods while sustaining strategic investments to ensure that we capitalize on the upside when the business inflects. It's these characteristics and our alignment to numerous concurrent secular growth trends that give us confidence that ADI will deliver on our long-term model of 7% to 10% revenue CAGR. Now one area underpinning this growth outlook are the applications tied to sustainable use cases, which currently represents about 1/3 of our total revenue. And today, I want to unpack a vital part of this, the evolving electrification ecosystem that is driving growth in our industrial and automotive markets. As the world marches to net 0, we need to eliminate 51 gigatons of global greenhouse gases emitted every year. Fossil fuels are by far the largest contributor accounting for more than 75% of all emissions. And at the same time, global energy consumption is forecasted to increase by 50% by 2050. A major unnecessary energy transition is underway and an upgraded and expanded energy grid is foundational to support a decarbonization pathway. Making the shift through renewable energy sources in both commercial and residential infrastructure as well as electric vehicles and global transportation will reduce greenhouse gas emissions. These moves also create new challenges in the generation distribution, consumption and smoothing of energy supply. ADI solutions are embedded across all phases of this electrification journey from upgrading the grid infrastructure to forming and managing the vehicle battery. The common thread woven through all these applications is the high-performance precision signal processing, control and power management capabilities they require, capabilities in which ADI excels. Now today, I'll bring the story to life at the application level, starting with grid infrastructure. Overall, today's electrical grid is undergoing modernization to meet current and future demands. Historically, traditional energy sources like coal, oil and gas were centralized and distributed in one direction from the grid to the consumer. Today, renewable energy sources like wind and solar are more distributed necessitating a dynamic bidirectional flow of energy. To achieve this, the grid must be able to adjust performance across the network in real time, which requires an exponential increase in monitoring and storage capabilities. And for example, our collaboration with the Enel Group provides smart meters and grid digitalization solutions for distribution system operators. Here, ADI's control and sensing technologies are enabling high-performance, precision monitoring and data creation at the heart of the digital substation. And we're leveraging our mixed-signal digital and algorithm technologies to enable greater intelligence at the grid's edge. Now moving to energy storage systems, which are critical to mitigate intermittency issues across the network. ADI is a leader with our technologies used in 60% of energy storage systems across residential, commercial and grid scale networks. Leveraging our battery management system technology or BMS. We're increasing capacity and improving energy utilization in energy storage systems, which maximizes the battery's lifetime value. These monitoring and storage challenges extend to the grid's edge as well, including EV charging stations, ADI's energy metrology, isolation and sensing technologies, help enable a broader range of applications in AC and DC charging equipment. In addition to these important applications in our highly diverse industrial segment, our high-performance signal processing platforms and domain expertise are helping to electrify the automotive market. Here, our technology is a key enabler in the transition from combustion engines to cleaner electric vehicles by increasing range and lowering cost. And I'll start with BMS. As we've shared before, we are the leader in this area with our BMS solution designed into 16 of the top 20 EV manufacturers. We're currently sampling our eighth generation solution, which utilizes software and algorithms to enable physical measurement capabilities all the way into the battery cell. These advances in edge processing change the game in how the internal battery health is managed, supporting faster charging and better range prediction. An extension of this is our wireless BMS solution, a first in the industry. It has all the benefits of our wired solution and enables a scalable battery architecture, with quicker and more cost-effective production cycles. Currently, our wireless BMS is designed in at four OEMs, and we expect another large OEM to adopt it in the coming quarters. Given this momentum and the cutting-edge value proposition, we believe the wireless platform will represent a large portion of our BMS revenue by the end of the decade. And looking ahead, we're broadening our EV capabilities beyond battery management and storage to power conversion solutions. Specifically, we're developing a silicon carbide-based smart switch for bidirectional onboard charging that significantly reduces charger size and weight by over 50%, thus driving down cost. Notably, this intelligent integrated switch enables the EV to transfer energy back into the network, creating a more reliable grid. And this innovation solution more than doubles our content opportunity per EV powertrain. So in summary, ADI is driven by a deep sense of purpose and a desire for our innovations to positively impact all stakeholders. We're immensely proud of the role our technologies play to improve the well-being of humanity and indeed the planet, and I remain very confident in our future. Our portfolio of cutting-edge technologies, world-class talent base are aligned with an unprecedented number of attractive secular trends, where the semiconductor content per dollar of CapEx is increasing tremendously. This presents ADI with continued profitable growth opportunities as well as the ability to shape the future of industries. And so with that, I'll hand it over to Prashanth.

Michael Lucarelli:

Thanks, Prashanth. I don't think I've been called young in some time, but I appreciate that. Now let's get to our Q&A session. [Operator Instructions] With that, can be our first question, please.

Tore Svanberg:

Yes. Thank you. I have a question for Vince. So I know you're not ready to call a bottom. But some industry observers would say that this sort of inventory build started maybe late 2021, early 2022 based on your guidance for the October quarter, you're sort of back to that level. So then you've seen these cycles, you've seen many of them. They're all different. But just wanted to get a sense for you what you think we're getting close, especially given what I just said about that inventory adjustment now sort of being complete?

Tore Svanberg:

Great perspective. Thank you.

Operator:

Thank you. Our next question comes from Vivek Arya with Bank of America Securities. Your line is open.

Prashanth Mahendra-Rajah:

Why don't I take that, Vivek. So first, quick comments just to make sure everyone has the Q4 guide, correct. So on the channel, as I said in the prepared remarks, we are shipping in below the forecast we have from our channel partners. So we are intentionally bringing channel inventories down to help set us up for some better strength. The -- included in the guide is the backlog coverage has some turns, but less than normal given the higher level of uncertainty. So we would need some more turns and positive book-to-bill, which Vince mentioned is likely to be a quarter or two out. And then just from an end market standpoint, we've got all end markets down quarter-over-quarter. So as you know, we don't guide out further than the current quarter, but some color is I think you essentially have it right. There's no reason to think that first quarter would not be down seasonal on a, which would call it, mid-single digit quarter-over-quarter. But that we -- our view is going to be driven by the holidays and the customer decisions to reduce inventory as they go into the year-end. So we're not, at this point, seeing a more meaningful step down in Q1 based on what we can know today. And I will just remember to plant and everyone as you start to model out Q1 that every once in a couple of years, we have a 14-week quarter, and that will be Q1 of '24. And then on gross margins, I think we're actually quite proud of our gross margin story here that we've been -- we've messaged a number of times that we would have the ability to maintain a 70% gross margin in a -- on a trailing 12-month basis with a peak to trough decline of 15%. Q4 is down about 17% from the Q2 peak. And while we didn't give you a gross margin number, if you impute it from the OpEx math that I gave you, you'll see that we are able to hold that north of 70%, and we'll continue to work that. For Q1, gross margins, my best sense now would be that we are likely to face a little more challenge on the utilization level as we bring inventory levels down, but we have been very successful in activating our swing capacity. We're actually doing about 10% better on utilizations because we have swing than if we hadn't activated it. So it's been a very powerful lever for us. And we need to see how the math on all of that works out for Q1, but I wouldn't expect Q1 to be notably different from kind of where we are for Q4.

Vivek Arya:

Thanks for that. Helpful.

Ambrish Srivastava:

Hi. Thank you very much. This is old Ambrish, Young Mike, can feel free to chime in. I was looking at the year-over-year comms, and I look at TI as your closest peer rival competitor. Vince, they started going into a year-over-year decline in 4Q '22 and you are just starting, and you said two to three quarters. So in the past history does suggest that usually on a year-over-year basis, we see roughly around four to five quarters of year decline. Is that the right way to think about your business? You said two to three quarters of digestion and I'm assuming that means year-over-year decline in reps, right?

Ambrish Srivastava:

Well, I was asking about the overall business, Vince, not just about the Comms, sorry.

Ambrish Srivastava:

Thank you.

Operator:

Thank you. Our next question comes from Stacy Rasgon with Bernstein. Your line is open.

Prashanth Mahendra-Rajah:

So when I gave you my comments of down seasonal that was on a 13-week basis, the 14-week was just a reminder as you model it. So Mike, do you want to do the math, but I think you're essentially thinking about it right.

Prashanth Mahendra-Rajah:

And thank you for clarifying that, Stacy, I wasn't clear in my answer.

Michael Lucarelli:

Yes. So again, you can parse it in normal times, 2Q is up, call it, 2% to 5% and a 13-week to 13-week quarter, if you take away an extra week, yes, you have a 7.5% headwind. They have got 1Q.

Michael Lucarelli:

I'll allow another question because that's a good clarifying question, Stacy.

Prashanth Mahendra-Rajah:

Yes. I think, Stacy, as we've always said, we run this business for the long term. So we're going to make the adjustments that are prudent to make on the discretionary side, adjusting the variable comp and where we can, but the value of this company comes from its innovation. So I wouldn't expect meaningfully more attack on the spending into 2024. But remember that our variable comp is designed to be highly accordion. So if '24 plays out as a down year, you will see that meaningfully unwind for us. Anything else...

Michael Lucarelli:

That's not a crazy level to think about for the year. I think if you take a step back and look at kind of what we're trying to manage within our control. We talked about gross margin maintaining at 70% a trailing 12-month basis. So for the full year, I think we can do 70% gross margins, and our goal is to maintain our operating margins within our long-term target and the low end of that account 42% to 45%. So that's kind of some guardrails we think about as you're modeling out next year and what would be a down year for revenue.

Michael Lucarelli:

Thanks Stacy.

Operator:

Thank you. Our next question comes from Chris Danely with Citi. Your line is open.

Prashanth Mahendra-Rajah:

Yes. All right. So thank you for the question. Chris, I think we're going to see you in a couple of weeks in New York. So on Auto, I guess some context first, we've grown for 12 consecutive quarters year-over-year. And including the fourth quarter, we're going to be up again. We said in the prepared comments that the lead times and the confidence supply is driving some of that acceleration in inventory adjustments and that's happening across all our markets. When we look specifically at Auto in the quarter and our growth rates there, the same strong growers, BMS, GMSL, A2B. They grew in the third quarter and both on a sequential basis and year-over-year. We expect kind of the similar strength from them into the fourth quarter. So I think that our outlook is, as Vince said, is really end market units driven and we have not yet put in a number nor have we received indicators from our supply chain partners that we should be making adjustments based on any disruption that could come from the negotiations that are going on right now.

Chris Danely:

Great. Thanks, guys.

Operator:

Thank you. Our next question comes from Harlan Sur with JPMorgan. Your line is open.

Prashanth Mahendra-Rajah:

Yes. Great. Okay. So let's do a couple of pieces on that. First, as a reminder, for a distribution company to do business with ADI, you have to give us your sell-through data on a weekly basis in arrears via electronic data feed. So we know exactly where our distribution guys are doing business, and we use that to run the company, as Vince always said, we run it on a POS basis. We said in the third sorry, in the second quarter earnings call, we said that we had gotten a little ahead of ourselves in China and that we intended to undership China. In the third quarter, we have done that. We are now intending to undership all markets generally in the fourth quarter to continue to bring the channel level inventories down. We have limited direct data visibility into our end customers inventory levels, except for those customers where we have consignment. But what we do have is the which you don't have access to is we can see the sales data of our products into our broad set of publicly external customers and their corresponding revenue growth. And our team builds correlation data based on that to tell us how we're doing versus how their growth is. And that's what Vince was referring to that we have seen that their growth is accelerating versus our growth to them, which is why we have confidence that we are undershipping their end market demand, allowing them to pull inventory levels down, which, of course, it is safe to do so because now we can get our products to them within 13 weeks.

Vincent Roche:

Yes. I think Prashanth said earlier, 85% of our total portfolio now is available in less than 13 weeks. Big, big change since this time last year.

Harlan Sur:

Thank you.

Toshiya Hari:

Hi, good morning. Thank you for taking the question. I had two quick ones, if I may. One on pricing. Vince, you mentioned that in the near term, it's more of a unit correction as opposed to a correction in pricing, which makes sense. To the extent foundry pricing improves into 2024, would you be in a position to share that sort of cost down, if you will, with customers the same way you've sort of passed on higher costs over the past couple of years? And then a second quick one for Prashanth. DOI 179, I think that's up, call it, 50, 60 days vis-a-vis pre-pandemic. How should we think about the new normal going forward? And how quickly can you get there?

Prashanth Mahendra-Rajah:

And I'll do the DOI one very quickly here, Toshi. So 179 days, balance sheet inventory grew call it, low single digits sequentially on a dollar basis. We have high confidence that we will exit Q1, taking out at least $100 million of inventory value. and the production plans are being oriented to allow us to do that. The days target, we have a model, but we've agreed that it is appropriate for the next CFO really to bless that model because they're going to own that and they need to kind of go through that map. So I can tell you that it's not going to be at 180 days, but I don't think we get back to 120 days. So we'll come back to you at some point on what that looks like.

Prashanth Mahendra-Rajah:

Thanks Toshi. Take last question, please.

Josh Buchalter:

Hi, guys, thanks for squeezing me in. And Prashanth, congratulations on the great run. You mentioned a few times under shipping in the print and the guidance. I was hoping you could maybe quantify the extent or maybe provide any sort of guidance to the amount that you're under shipping? And then given it sounds like seasonal fiscal first quarter isn't off the table. Does that mean we kind of expect you could be shipping to end demand exiting the October quarter? Thank you.

Michael Lucarelli:

Sure. On the first -- it's good question. If you look at the first quarter, we always typically undership consumption in the first quarter, why? You see a lot of our customers reduce their working capital going into end of the year-end. So the down 5% in our -- seeing the seasonal first quarter is below consumption. I think after that, you get back to kind of what Vince was saying you get coming back to demand and consumption, all kind of imbalance. And then it comes to a question of macro, what's happening in macro in our second quarter. Thank you, Josh.

Michael Lucarelli:

Any time. Thanks, everyone, for joining us this morning. We once again will be on the road a lot this quarter. You'll find us in New York, Chicago, Florida, London and San Fran. Reach out to IR team to be notified when we are in your ZIP code. And with that, thanks for joining us and the interest in ADI.

Operator:

Good morning, and welcome to the Analog Devices Second Quarter Fiscal Year 2023 Earnings Conference Call, which is being audio webcast via telephone and over the web. I'd like to now introduce your host for today's call, Mr. Michael Lucarelli, Vice President of Investor Relations and FP&A. Sir, the floor is yours.

Vincent Roche:

Thanks, Mike, and good morning to you all. Well, I'm very pleased to share that ADI continued to execute well in the second quarter. We delivered our 13th consecutive quarter of revenue growth and record earnings per share. Notably, revenue was $3.26 billion, growing 10% year-over-year. And once again, this was driven by record results in our industrial and automotive sectors. Gross margin was nearly 74% and operating margin surpassed 51%, reflecting the innovation premium our portfolio commands and our strong financial discipline and EPS increased an impressive 18% year-over-year. Now I'd like to spend a moment on the current business conditions. We previously shared that our business was at an inflection point due to uncertain economic and the geopolitical backdrop. After three years of steady growth, customers are beginning to adjust their forecasts and rebalance their inventories. This is most pronounced in Asia, while North-America and Europe demand is moderating, but at a more measured pace. We expect this normalization of revenue will persist through the second half of 2023. Importantly, given our customer conversations and proactive decisions to improve lead times and right-size our backlog, we're in a position to deliver on our goal of delivering a soft lending. Stepping back, we've successfully navigated macro challenges many, many times before. Today, ADI has an even more durable franchise, defined by an unmatched diversity of products, customers and applications. A hybrid manufacturing model that better adapts to demand fluctuations, and of course, a fortified balance sheet. These characteristics instill a resiliency, that helps ADIs mitigate market weakness, and invest through economic cycles in critical areas that will define our future. Notably, unlike previous economic cycles, we have numerous concurrent secular growth drivers across all of our markets that drive more semi-content per dollar of CapEx. And we have exposure to sectors that will transcend the macro uncertainty, including areas like digital healthcare, aerospace, defense and the electrification ecosystem. So to that end, I want to highlight our digital healthcare business, which resides in our industrial end market. Healthcare is a market that is ripe for renovation and it's one that requires the highest levels of performance. Now currently, the United States leads the world in healthcare spending with more than $4 trillion spent in 2022 alone, approaching 20% of GDP. This amount has steadily increased over several decades, and unfortunately does not correlates to world’s leading health outcomes. Both the U.S. along with most international healthcare systems are still reliant on serving the majority of patients with critical or chronic conditions in large, centralized, acute-care hospitals, where specialized expertise and equipment resides. The pandemic highlighted the fragility of the system, underscoring the urgent need for remote physician consultation and distributed clinical grade patient care. This vision of a decentralized system to improve the accessibility, affordability and efficacy of global healthcare can only be realized through the proliferation of edge-based diagnostic and therapeutic technologies. ADI saw this promising opportunity early and made digital healthcare a strategic focus area over a decade ago. Over that time our R&D investments have expanded our portfolio from core signal processing, sensing and power technologies to more highly integrated application specific products to now full system level solutions. The result, our healthcare franchise has delivered seven straight record revenue years, generating $900 million annually and we're on track to achieve a new high watermark in '23 despite the macro backdrop. Importantly ADI has become an industry leader in three primary areas. The first is medical imaging, where our highly integrated products performed critical functions. This includes enhancing image quality, minimizing radiation dosage, improving system assembly, and simplifying field maintenance. Today, we've strong share positions in areas like CT scanners, digital X-ray and ultrasound. Next is automation and instrumentation. For example, our broad portfolio enables us to create the optimized signal chains required in applications such as infusion pumps, ventilators and defibrillators. Third is personal health monitoring. Here, our highest performance products are used throughout the operating room and the ICU, while more compact versions with lower power are designed into wearable devices performing both clinical and consumer wellness monitoring functions. Now let me share some of the examples of how we're seeing ADI's solutions shape the future of healthcare. The ultrasound industry is migrating from large cart based equipment to more compact mobile systems. Recently, ADI won the design as a market leader for their compact ultrasound system. Our solution leverages our complete portfolio including high speed signal chain and high voltage power technologies, to deliver the highest quality images at the lowest power in a smaller footprint. We're also developing an echo to bits technology to untether the ultrasound modality from the hospital and enable hospital grade care in even the most remote locations. Our solution uses proprietary ultra-low power analog technology that performs both the data acquisition and beamforming functions at extremely low power levels with embedded software algorithms. This allows the user to get cart based performance in a handheld form, without compromising image quality, resolution, or functionality. Now turning for a moment to robotic surgery. Currently, only about 15% of the world's surgical procedures use robotic technology despite the many benefits. These include greater precision, flexibility, and control during surgery and shorter hospital stays, fewer complications, and lower levels of pain for patients. We already designed in, at the largest robotic surgical suppliers with our suite of precision motor control, signal processing, power management and sensing solutions. And with content per system in the thousands of dollars and performance demands increasing exponentially, this application is poised to deliver significant growth in the years ahead. In the area of personal health monitoring, clinical grade vital signs monitors are converging with consumer wellness wearables. Now this is an emerging market for our comprehensive suite of technologies, including our sensor AFEs, microcontrollers and ultra-low power technologies, which has been strengthened by the integration of Maxim. For example, in diabetes management, ADI has long been a leading supplier of blood glucose monitoring technology. Now we're working with key customers in the next-generation of continuous glucose monitoring. Our solution increases the level of robustness, accuracy and power efficiency of the glucose sensor, thereby extending its life from days to weeks. And there is much, much more to come. We are extending our reach into innovative medical products that connect our hardware with cloud-based connectivity analytics and service. I'm delighted to share with you that our first non-invasive chronic disease management device is undergoing marketing clearance with the FDA and I look-forward to sharing more as this new market has the potential to significantly expand our healthcare segment (ph). So big picture, we're shaping the digital revolution in healthcare. ADI's ability to go from component to system supplier underscores our deep domain expertise and unrelenting focus on innovation. Setting us apart from the pack, not only in healthcare, but in all of our markets. So while there is near-term uncertainty, we are excited about the long-term opportunities that lie ahead. The center of gravity for data processing is shifting from the cloud to the edge. And ADI where data is born is at the center of this evolution, enabling the next waves of innovation for our customers. Now before I hand over to Prashanth, I want to address our announcement that he will be leaving ADI at the end of the fiscal year. I want to recognize, Prashanth for his many contributions and for his partnership over these past six years. He has played an important role during a period of extraordinary growth and value creation for ADI, including help build a robust finance function and fostering strong investor community engagement. Please know that Prashanth will be remaining in his full capacity and continuing to engage with all of you while we identify our next CFO through a search process that is now underway. And with that, I'll hand it over to Prashanth.

Michael Lucarelli:

Thanks, Prashanth. I want to echo Vince's comments and thank you for the partnership over the past six years, but I will warn you, it's not done yet, we’ve couple of more earnings calls together. So with that, 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 requeue and we'll take your question if time allows. With that, can we have our first question please.

Vivek Arya:

Thanks for the question and thanks and best wishes to Prashanth. So my question really is, I'm trying to understand where is the incremental weakness, is that limited to Asia and within Asia is that industrial or automotive or both? And what about non-Asia demand, how has that changed versus what you had thought three months ago?

Vivek Arya:

Thank you.

Operator:

Our next question comes from the line of Tore Svanberg with Stifel.

Prashanth Mahendra-Rajah:

Yeah. Thank you. Thank you, Tore. It's been great working with you. So, as we think about inventory, inventory is going to remain higher than normal because we're keeping the channel lean. This is something we started two or three quarters ago. From a dollar basis, inventory has peaked in second quarter as I mentioned in my prepared remarks, and you should see dollar start to trend down from here, given the actions that we're taking, which is both reducing our external wafer builds, which is an opportunity that we have because of our swing capacity in our hybrid manufacturing model, and that also allows us to balance out the die bank building in our internal factories with softer demand and tap the brakes on internal (ph) utilizations. Utilizations, I would say, still are at elevated levels, so we expect them to start getting closer to what we would consider normal levels in the -- in our fiscal fourth quarter.

Tore Svanberg:

Great. Thank you.

Operator:

Our next question comes from the line of Ambrish Srivastava with BMO Capital Markets.

Vincent Roche:

Hi, Ambrish. We hear you.

Vincent Roche:

What I would -- I guess, let me, let's do this in two pieces. First, let's talk about our view on this correction. Obviously no correction is the same. But if you look over at history, Ambrish, most of these sort of downturns last for somewhere between two to four quarters, and it's our view that, that we're going to have weakness for the second half. But a couple of points around that. First, we are really seeing this as a rolling correction across the market, because obviously no market is fully immune, but I do think that we're better-positioned. Comms and consumer, I think we -- you would agree with us, the worst is largely behind us with. We've seen those correct over the last couple of quarters and we're actually being a little bit more optimistic about consumer as we go forward. Industrial and auto, we're starting to see some softness, but that's probably not going to just last a quarter. It's important to point out that we do have some areas of strength in industrial. We mentioned that in the prepared remarks. And auto really is going to continue to be a function of the of the SAR activity. From a bookings and backlog standpoint, the takeaways you want is, bookings overall continue to decrease, but they're basically sitting at about a year of revenue, the total backlog. What that means is that the backlog for the current quarter is now to normal levels, which means that we're back to a point where we will be relying on some book and ship to hit the guide and that's back to normal pre-COVID levels, and on a book-to-bill were below parity, which we had said for a couple quarters now that this was coming and that's pretty broad-based to sort of all markets, industrial and auto are a little bit better, but all markets, all geographies, I did call out on -- in I think Tore's question that China is certainly the weakest of that.

Michael Lucarelli:

Thank you, Ambrish. We'll go to next question.

Joseph Moore:

Great. Hi. Let me add my congratulations to Prashanth. Can you talk about the backlog being out over a year, when 70% of lead times are below 13 weeks. How much -- I know you've been pretty aggressive scrubbing that backlog. How confident are you that, that reflects real demand? And then, can you sort of describe, it seems like you're still getting a pretty decent amount of bookings, considering that people have booked out 52 weeks and can get product within 13. Can you just -- are people still placing orders beyond lead time to try to assure continuity? Thank you.

Vincent Roche:

Yeah. I think, Joe, at the margins, I think our customers have changed their behavior. It used to be that the world expect to be able to operate on a very rapid turns cycle. Now I think that, that will persist, but what will also persist is the change in behavior around aligning long -- customers allowing their long-term or longer-term demands with supply. And those are conversations that we're having continuously. So I think the behavior has changed somewhat, and perhaps we've got a new normal.

Operator:

Our next question comes from the line of Chris Danely with Citi.

Prashanth Mahendra-Rajah:

Yeah. Chris, I don't know that I would call it a trigger per se. I think that -- as I mentioned, we've been sort of rolling through this. It is just that there has been enough growth in some parts of our market that have overshadowed the pressure we've seen on comms and consumer. Now industrial, which is really the flagship is starting to feel a little bit of the impact from the higher interest rate environment. So that's coming through. But again I would call out that we've got a pretty sizable portion of that industrial market that is very recession resistant, that's the healthcare business, which Vince talked about the aerospace and defense, as well as our energy business. I think what I mentioned I think to Ambrish's question is, the piece that perhaps with most surprising to us is, we were expecting a stronger bounce in China, as they reopened from COVID and they got on the other side of Chinese New Year, and that recovery has not happened. And again, as I mentioned, we know that it's not a share issue. It is macro issue to that market. And what was the -- what was the second part of your question?

Prashanth Mahendra-Rajah:

I'm going to -- I'm going to turn to the 40-year veteran of this business, who has seen multiple cycles and let Vince take that.

Prashanth Mahendra-Rajah:

Yeah, Chris. I’ll add a little bit about -- unit demand for the couple of quarters here. It's good to think like, we've grown 13 quarters of relatively. I think investors and sell-side people forget that you do have down quarter sometimes. And we're kind of going back to, what I'll call a bit more normal and a more normal 4Q, you kind of -- you see industrial kind of flat to down from 3Q, orders about flat. Comms not much activity happening right now in that market and consumer usually up a little bit. And if you look at our 1Q, a normal 1Q for us, the B2B markets, which is industrial, auto, and comms are down, kind of low mid-single digits and consumer is down a bit more due to holiday builds. And then you get a 2Q pickup. Now that's not an outlook. That's kind of what the normal shape was pre-COVID.

Chris Danely:

Thanks, guys. Thanks for the color.

Ross Seymore:

Hi, guys. Just want to echo the congrats for Prashanth. A quick clarification then a question. The clarification is when you talk about the second half being a little bit weaker is that fiscal year or calendar year? And then the two question is on the automotive side of things. You've mentioned a couple of times that it's kind of SAR dependent, but the bigger trend in automotive over the last few years has been mainly content. And you guys have benefited from that as well. I think you're one of the first companies in the semi side to guide that down, albeit minimally on a sequential basis. Has something changed there, that you're seeing that others aren't, is it inventory, is it demand, just anymore color on that would be helpful?

Michael Lucarelli:

Yeah. I'll go the first part, Ross, I gave a little bit of comments around kind of what I thought would be for our fiscal 4Q and fiscal 1Q outlook based on kind of normalization. So you can kind of take from that and parse that with your question about is it fiscal second half or calendar second half and put it along that, it's both. With that, I'll pass it to on the auto side.

Ross Seymore:

Thank you.

Operator:

This question comes from the line of William Stein with Truist Securities.

Prashanth Mahendra-Rajah:

Yeah. Thanks, Will. I'm going to do the China one first, so Vince can address the pricing one. The China one is pretty straightforward. We -- as most of the industry, we were watching the recovery coming out of the multi-quarter shutdown in China as well as the Chinese New Year activity looking to see business begin to return to normal levels, given that we had couple of down quarters. We saw a pop-in activity and order activity in the -- as we came out of Chinese New Year. Based on that, we made supply available to the channel that supply did not move as things kind of quickly got softer or didn't move as much I can say, didn't move as much. And therefore, that's why we've now said, for the current quarter, we are going to ship in less than we sell-through to help readjust that level in primarily in Asia. And with that, I'll hand-off to Vince to take the pricing question.

William Stein:

Thank you.

Operator:

This concludes today's Analog Devices conference call. You may now disconnect.

Operator:

Good morning, and welcome to the Analog Devices First Quarter Fiscal Year 2023 Earnings Conference Call, which is being audio webcast via telephone and over the web. I’d like to now introduce your host for today’s call. Mr. Michael Lucarelli, Vice President of Investor Relations and FP&A. Sir, the floor is yours.

Vincent Roche:

Thanks very much, Mike, and good morning to everyone. Well, I’m very pleased to share that ADI continued to execute exceptionally well in the first quarter of fiscal 2023, despite continued macroeconomic uncertainty. Revenue was $3.25 billion, up 21% year-over-year, strength was broad based with all B2B markets, up single-digits. Gross and operating margins were 74% and 51% respectively and adjusted EPS achieved another record at $2.75. Our continued success is driven by a relentless focus on customer collaboration, a growing demand for our innovative technologies and strong operational execution. We play a long game and are excited about what the future holds for us to ensure that we capture the opportunity ahead. We’ve been steadily increasing investments in R&D, manufacturing capabilities and in partnerships that deepen our value to our customers now and over the long-term. For example, in R&D, we’ve invested $1.7 billion over the trailing 12 months to strengthen our core franchises and capture market opportunities presented by secular growth drivers. Over the same period, we’ve invested $760 million in CapEx to enhance the resiliency of our internal semiconductor manufacturing operations. These investments not only increase our operational resiliency, but also modernize our fabs to better address our sustainability ambitions. As mentioned in our press release, our industrial and automotive businesses remain strong as we gain market share. So this morning, I want to focus specifically on our industrial business, which continues to grow significantly despite the macroeconomic backdrop. Now, from a big picture perspective, the industrial market is the bedrock of ADI, representing more than half of our total revenue. It’s also our most diverse and profitable business segment with tens of thousands of customers and products that sustain revenue streams for decades. Additionally, ADI’s industrial revenue is derived from high performance technology in mission-critical CapEx-intensive equipment across the myriad applications. Our leadership position has been strengthened over the last decade as we intensified our focus in this market and invested over $5 billion in R&D activities to capture the opportunity across the hundreds of applications that characterize the industrial sector. This space is inherently fragmented and the unmatched breadth and depth of ADI’s portfolio uniquely allows us to address our customer’s needs across the full spectrum of applications. With core component building blocks to application-specific solutions that encompass analog, digital and algorithms. Today, we’re seeing the rise of new industrial applications that require more sophisticated and more complex architectures as machines become more intelligent and more sustainable. This is driving more semiconductor content per dollar of CapEx, unlocking new opportunities for our portfolio. While this transformation is benefiting all of our industrial applications, including healthcare and aerospace, let me share how we’re winning an industrial automation and instrumentation more specifically and discuss the burgeoning opportunity across the electrification ecosystem. So, starting first with industrial automation. Here, our customers are upgrading their factories with more automation and connectivity to increase output with greater energy efficiency. ADI’s broad portfolio helps customers create these more resilient and flexible footprints while lowering their carbon emissions on the journey to net-zero. As an example, at a leading U.S. robotics manufacturer, we’ve won additional content across power sensing and GMSL connectivity. Our systems approach reduced our customers’ design time and increased our content per cobot by 4x. Also in the last quarter, our IO-Link solution was designed in at multiple leading industrial automation customers. These solutions are critical for delivering robust connectivity to the edge of the factory floor. Turning our attention now to our instrumentation and test business. This subsector is highly aligned to secular growth trends from connectivity to AI-assisted compute to electrification to drug discovery and gene therapies. The consistent thread across this diverse set of applications is the growing complexity that requires more advanced metrology and test. The results, our average content per system is now 2x to 3x higher. Further, the localization of semiconductor supply is providing additional tailwinds for our test business. We’ve secured multiple design wins in North America as well as Asia for memory and high-performance compute. And finally, on to one of our fastest-growing areas, the electrification ecosystem. The collective need for a more sustainable future is driving massive growth in electrical grid infrastructure. Now let me share two examples with you. First, industrial and automotive companies have announced more than $300 billion of investments in greenfield gigafactories, essential to the production of batteries to proliferate the electrification ecosystem. These gigafactories will drive additional demand for our formation and test solutions critical to producing higher density batteries. Further, given the inherent safety hazards of using higher cell voltages, these factories will also provide new growth vectors for ADI. In our sustainable energy franchise, we’re leveraging our industry-leading automotive BMS solutions into energy storage systems for electrical grids and fast-charging infrastructure. We’ve won designs at leading EV infrastructure manufacturers in North America, Europe and Asia, putting us on a path to more than tripling this business in the coming years. Of course, while no market is fully immune to adverse economic cycles, our industrial business is highly diversified and aligned with secular trends. This has translated to more durable revenue streams with sales in this sector increasing more than 25% over the trailing 12 months despite a weakening economic backdrop. But looking ahead, we see continued strength in this franchise as the breadth and depth of our portfolio, our deep customer collaborations and design win pipeline momentum underpin our new phase of profitable growth. So in closing, ADI’s business model is diverse, resilient and rich with opportunity. I’m very optimistic about what our future holds as we drive enhanced value for our customers employees and shareholders as well as society at large. And so with that, I’ll hand you over to Prashanth.

Michael Lucarelli:

Thanks, Prashanth. Let’s go to the Q&A session. We ask that you limit yourself to one question in order to allow for additional participants in the call this morning. If you have follow-up question, please requeue. I’ll take your question if time allows. With that our first question, please.

C.J. Muse:

Yes, good morning. Thank you for taking the question. I guess the – my question really would center around the industrial strength that you’re seeing. You talked in great detail around kind of emerging new markets as well as increasing content yet, I think a lot of investors are focused on kind of declining PMIs around the globe. And so we’d love to hear your thoughts on why your business is, acting so very different from, maybe some of the larger macro trends. And perhaps more color on how much of it is content? How much of it is maybe emerging growth areas that are not reflected in some of these PMIs would be very helpful? Thanks so much.

Prashanth Mahendra-Rajah:

C.J., this is Prashanth. I’ll just put one more thing just to help folks understand kind of the breadth of that growth. All of our submarkets were up double digits year-over-year, and most of them increased quarter-over-quarter. And if you look at it by geography, we had strength in America, Europe and Japan, again, all up double digits year-over-year, offsetting a weaker China. So this industrial strength was very broad-based.

Operator:

Thank you. [Operator Instructions] Our next question comes from the line of Vivek Arya from Bank of America Securities.

Prashanth Mahendra-Rajah:

Okay. Yes. So Vivek, let me maybe take a walk through cancellations, backlog lead times to help answer that. But I do want to clarify, you said on book-to-bill. Our book-to-bill is sub one. I thought I heard you say it was one. Our book-to-bill is sub one. We told you that was happening a couple of months ago, and I’d expect to carry for another quarter or two as we get through this backlog. So on the backlog, we’ve been saying for a while now that we’ve got record backlog, and we are working with our customers and our disti partners to get this rationalized with what customers need today versus perhaps the orders they had placed on us six months or nine months ago when we had very long lead time. This progress is what is being reflected in that book-to-bill ratio below one. I think that it will probably be below parity for another quarter or two as we get back to normal backlog. Lead times, the supply-demand imbalance is definitely getting better, slowly, but it’s getting better. We’re getting more wafers externally, thanks to the hybrid model. We have the flexibility to do that as well as the investments we’re making internally as we’ve talked about with our CapEx deployment to increase production. So, we have about 50% of the portfolio under 13 weeks today, meaning it can ship within the quarter, and that’s going to continue to improve over the – through the second half. So takeaway sort of given lead times falling, bookings getting higher quality compared to year ago as customers aren’t ordering for stuff way into the future. And at the place backlog, and we feel this is positive for visibility, and we’re really getting to true demand.

Prashanth Mahendra-Rajah:

So, I don’t want to go out too far, but I’ll just give you a couple of comments here. And if Vince wants to make any long-term comment. We feel good about the outlook for the second quarter given the resiliency in auto and industrial. As I said, 75% of our sales come from those two segments, and we still have a year for the backlog. Beyond the second quarter, it’s hard on the one hand to make a call, given that we have strong backlog coverage, but we also understand there’s a lot of macro uncertainty out there and things are changing fast. So, I’m not going to make any predictions one area to pay attention to, and Vince made a comment on this, is China. I think we and many companies are watching China. If demand accelerates in the second half given sort of the optimism on consumers and government that would be – that would be good for a number of organizations. Vince, anything more longer term, you want to add on that?

Michael Lucarelli:

Thanks, Vivek. Next question please.

Tore Svanberg:

Yes, thank you and congratulations on the results. So on Maxim now that we’re sort of moving from the cost synergies to the revenue synergies, are there any particular areas that we should keep an eye on there, whether end markets or product categories where you expect to see that $1 billion in synergies?

Vincent Roche:

Yes. When we announced the combination, Tore, with Maxim, we pointed out two particular market areas where we thought ADI was underweight, where power in particular, power management was really important, power in data center, for example. And as the compute density skyrocket, and in fact in the compute area, performance and power are pretty much one and the same thing. So we have now a very competitive power portfolio that we can bring to more application specific areas such as data center as well as automotive. The – I think a very positive surprise is that the connectivity portfolio based on GMSL, the multi gig serial link is that not only are we gaining more and more traction in automotive, but also we’re bringing it to other areas such as industrial, as Prashanth mentioned. BMS, we’ve got 16 of the top 20 wired BMS OEMs sockets in the top 20 OEMs. And Maxim strengthens that portfolio as well. So in industrial, I mentioned in the prepared remarks that the I/O link technology is very, very, that Maxim brings to bear is very, very complementary with ADI’s data path solutions. So I think there are multiple areas and I think the message I want to convey here is that I was always optimistic about what we could do with a greater channel, more cross connectivity to the ADI portfolio. But I’m more enthusiastic than ever based on what I’m actually observing now with the various markets and customers in which we’re playing.

Operator:

Thank you. One moment for our next question. Our next question comes from the line of Chris Danely from Citi.

Prashanth Mahendra-Rajah:

Sure. Chris let me – Michael have to remind me where we were three months ago. But the – so the supply demand balance is getting better. And we’re getting that – we’re getting more wafers, so – in addition to our internal production. The way to think about the lead times is we’ve got half the portfolio shipping within the quarter. And certainly in the next quarter or two, we will have the overwhelming majority of that down to within one quarter. The inventory build as I mentioned, is in part due to our desire to kind of keep more inventory on ADI’s books because we are clearly in a period of great uncertainty and we’re being very mindful of putting too much to our channel partners when there’s this much uncertainty out there. So that will – as lead times improve, our channel partners can count on us to get what they need in quick terms, and then we’ll be able to more reliably think about what’s the right stocking level for the channel.

Chris Danely:

Great. Thanks guys.

Stacy Rasgon:

Hi, guys. Thanks for taking my question. Maybe it’s a dumb question. But I’m having a little bit of trouble squaring the majority of the portfolio getting to be within 13 weekly times together with a year’s worth of backlog. How do I square those two things? It feels like the backlog should be shorter if the lead times are actually like getting back to normal. Maybe the other way to ask it is when the majority of the portfolio has 13-week lead times, where do you expect that backlog to be?

Stacy Rasgon:

Oh, I see. Okay. So you’re – okay, so you’ve got orders out. We know that we’re going to be shipping this to you in six months and they placed it [ph]. So I guess where do you expect that backlog to be standing given what you see for demand once, say we’re in a quarter to pass this and the majority of the portfolio is shipping within a quarter. Where do you expect the backlogs to be?

Stacy Rasgon:

Got it. So I guess, does this mean, are you effectively over shipping demand right now because the backlog is pulling it? Or is that not the right way to think about it?

Vincent Roche:

Yes. One other thing we’re pointing out, Stacy, is that we run – our demand signals are sell through. We run our factories on the basis of POS demand rather than sell in or POA demand. So it gives us more integrity around the demand signal.

Michael Lucarelli:

Thanks Stacy, for that three part question. You use your question for next quarter, so we’re not going to – have the call next quarter. Next question, please.

Ambrish Srivastava:

Hi, thank you. I’m going to keep it to one. Mike, I don’t want to get any of bad site. Vince, I actually wanted to focus on a bit on the long-term here. I was called out a much higher growth rate for analog and for themselves as a result. And I was wondering if you share the same view, I know you guys have had a 7% to 10%, and Vince you have always all the conversations over the years, you always felt that the analog industry going forward should grow faster than the 5.6 odd that we’ve seen over the long-term. So I was just wondering how you think about analog growth and you called out a bunch of secular drivers that, four or five years ago didn’t even exist for the analog industry and broadly for semis. Thank you, Vince.

Prashanth Mahendra-Rajah:

Ambrish, Prashanth, maybe just a just two things to add. First our long-term growth model is built on all of our segments. So industrial certainly is an important, very, very important part of it. But we look for all of our operating segments to be able to contribute to that. We’ve had two consecutive record years with greater than 20% growth. And with the numbers that we’ve shared today, we’re off to a strong start for 2023. Our 7% to 10% CAGR outlook, which we revealed, unveiled last April, already reflected a faster growth versus sort of the historical mid-single digit rate. And as we said in the prepared remarks, as well as in addressing, I think it was Tore’s question we have a, we have meaningful delta with the revenue synergies from Maxim, which is really idiosyncratic to the ADI story.

Prashanth Mahendra-Rajah:

Thanks, Ambrish.

Michael Lucarelli:

Not a bad side.

Michael Lucarelli:

Last question please.

Harlan Sur:

Hi, good morning. Thanks for taking my question. There’s second half uncertainty as you mentioned, probably more so in your comms and consumer businesses, maybe a little bit in industrial due to the soft PMIs as was mentioned earlier. But global auto demand trends, especially EVs remains pretty resilient, right? And you guys have a strong design wind portfolio and automotive that is starting to unfold. I know last earnings call, last month at CES, the team remained pretty confident on growing your automotive business this year by double-digit percentage on a flattish, sort of SARs. So, if you look at some of the third party research, I mean, SARs is forecasted to grow 2% to 3% this year. So is the team still confident on driving strong double-digit percentage growth profile this fiscal year on auto?

Harlan Sur:

Perfect. Insightful. Thank you, Prashanth.

Operator:

This concludes today’s Analog Devices conference call. You may now disconnect.

Operator:

Good morning, and welcome to the Analog Devices Fourth Quarter and Fiscal Year 2022 Earnings Conference Call, which is being audio webcast via telephone and over the web. As a reminder, this event is being recorded. I'd now like to introduce your host for today's call. Mr. Michael Lucarelli, Vice President of Investor Relations and FP&A. Sir, the floor is yours.

Vincent Roche:

Thank you, Mike, and good morning to you all. Well, I'm really extremely pleased to share that we delivered another record quarter, capping off what was a better year for ADI. Our fourth quarter revenue was $3.25 billion, and adjusted EPS was $2.73, and both at the high end of our outlook. For the fiscal year, revenue was $12 billion, up an impressive 26% year-over-year on a combined basis. Our Industrial, Automotive and Communications markets delivered all-time high revenues, and our Consumer business continued to grow despite industry-wide weakness. Adjusted EPS increased by nearly 50% to $9.57. We also delivered on our commitment to return 100% of free cash flow to shareholders in '22, returning $4.6 billion through share repurchases and dividends. These results not only exemplify the strength of our portfolio, but also our deep customer focus and the hard work of our employees to fortify ADI's brand. To that end, in my recent conversations with customers, the message has been very clear. While we're not immune to supply disruptions, ADI’s service, quality and support throughout this challenging time continues to be outstanding. Importantly, this sentiment is shared by customers of all sizes and across all markets. As a result, our customers are calling upon ADI to engage in longer term, more strategic collaborations to develop solutions that further empower the intelligent edge. So to ensure we remain at the forefront of technological advancements and customer service. We invested $1.7 billion in R&D and $700 million in CapEx in FY'22. Now let me start with R&D. Our investments are targeted at strengthening our foundational high-performance Analog franchises as well as moving up the stack to create more complete solutions for our customers. A prime example is our Apollo platform, which we previewed at our Investor Day in April. Apollo is a flexible high-speed signal processing platform with unmatched levels of functionality, integration and performance, making it ubiquitous for all customers, but especially appealing to those in the broad market. During the quarter, we began sampling this innovative platform with our aerospace, communications and instrumentation customers and their feedback has been extremely positive. Turning now to the operations side. Over the last year, we invested a record amount of CapEx to increase our manufacturing output. And in 2023, we are, once again, investing aggressively in our U.S. and European factories to significantly expand our capacity. These investments will create a more flexible and cost-effective hybrid manufacturing model by increasing our swing capacity to around 70% of revenue in the coming years. Our R&D and supply chain investments are essential to support our design win pipeline, which expanded by more than 10% in '22. This growth was led by our automotive energy systems and digital healthcare businesses. Notably, our growth in Automotive was underpinned by battery management systems, or BMS, which now has an opportunity pipeline nearing $4 billion. This year, eight new manufacturers designed in our BMS solutions, including two that plan to utilize our wireless platform. Our strong leadership position combined with increasing EV penetration globally, gives me great confidence in our future growth prospects. Looking now at some selected design activity in the quarter. In industrial automation, we were designed into an advanced diagnostic system that monitors machine health at a global supplier for energy exploration. Our system solution approach enables an approximate 50% reduction in size and lowers wiring costs meaningfully. In aerospace and defense, we won RF module programs at multiple defense prime contractors. Our modules integrate hundreds of components to simplify the design process for our customers, while increasing our content from hundreds to thousands of dollars per system. In industrial instrumentation, we secured wins at two market leaders of next-generation high-voltage testers for electric vehicles and renewable energy systems. The combination of our high voltage processes and precision technology enables us to deliver accurate, reliable, and efficient testing required to scale the manufacturing of these systems. And lastly, in Communications, we expanded our leadership in 5G radio systems with our transceiver portfolio winning additional share at key suppliers. These new wins position us even better as 5G networks roll out globally, especially in India, and ORAN begins to proliferate. Importantly, our design pipeline is beginning to benefit from cross-selling our ADI and Maxim portfolios. This puts us on a path to achieve our target $1 billion in revenue synergies. For example, at a European auto manufacturer, we built upon our strong audio connectivity position to cross-sell our high-speed GMSL technology, connecting their advanced driver systems. We're also capturing new opportunities with GMSL in the Industrial market. Last quarter, for example, our technology was designed into autonomous order fulfillment systems at one of the largest e-commerce companies. We're also making great inroads with our broader power portfolio, where our opportunity pipeline increased by double digits last year. Our increased breadth is helping us to better match customers' performance and power trade-offs across more applications, expanding our power SAM to nearly $10 billion. For example, at a leading European industrial customer, our position in mid-voltage power for distributed I/O control systems enabled us to pull through additional power content and precision signal chain sockets, thereby doubling our content per system. Our expanding pipeline and significant revenue synergy opportunities instils greater diversity and resilience into our business, while adding new growth vectors. And taken together, I'm confident in our ability to bend the growth curve and move from our historical mid-single digit growth rate to our long-term model of 7% to 10%. So in summary, while the macro crosscurrents are creating an abundance of uncertainty, ADI has successfully navigated many slowdowns over the course of our 57 year history. The strength of our franchise allows us to invest through business cycles, ensuring we continue to deliver breakthrough innovation, deepen our relevance to our customers and capture the emerging secular opportunities at the intelligent edge. And so with that, I'll pass you over to Prashanth.

Michael Lucarelli:

Thanks, Prashanth. Now let's get to my fair part of the call, the Q&A session. We ask that you limit yourself to one question in order to allow for additional participants on the call this morning. If you have any follow-up question, please queue and we'll take your question if time allows. With that, can we have our first question, please?

Tore Svanberg:

Yes, thank you, and congratulations on another record quarter. Vince, a question for you. When you talked about the design wins, some of the design win activity, we continue to hear more and more of the system solutions. And I was just wondering if you could add a little bit more color on how your growth is being driven by higher ASPs? So I'm not suggesting higher pricing, right? I'm talking about higher ASPs because all of your products, obviously, moving up the value chain to more of a system solution type perspective.

Michael Lucarelli:

Go to next question please.

C.J. Muse:

Thank you for taking the question and happy early Thanksgiving. I guess I was hoping to probe a bit more around the cautious but optimistic view. You talked about orders stabilizing and a backlog that extends out 12 months. So I guess, first question, can you talk about what kind of scrubbing you've done on that backlog? And then secondly, based on that, how does that inform your outlook heading into fiscal '23?

Vincent Roche :

Yes. One other thing, C.J., to note. We've said before, the signal we watch most carefully in terms of really trying to understand demand is sell-through rather than sell-in. So that, I think, gives us a deeper degree of reality and the match between true demand and supply.

Vivek Arya :

I actually wanted to follow up on that question. Vince or Prashanth, are you surprised why your orders and bookings are holding up better, even though all the headlines we see from a macro perspective seem to be getting tougher? So what is helping you? And then specifically within your Industrial business, is it fair to think that factory automation is perhaps the most macro exposed part? And if yes, how should we think about that specific part of your most macro exposed segment within the Industrial business going into next year?

Prashanth Mahendra-Rajah :

Yes. Maybe, Vivek, just -- first, just to emphasize something that we said in the prepared remarks, all subsegments in Industrial grew in the fourth quarter, and we feel pretty good about where we are. From a strength in Industrial versus the other markets, I'd look at it two ways. First, from a supply standpoint as we were seeing demand softening in other markets, we have the ability to use our hybrid model to get more wafers from our external partners, and we are biasing this additional supply into the industrial market, which has remained resilient and strong. At the same time, recall, we made a decision early in the supply disruption to make sure that we were taking care of our broad market and our smaller customers who tend to be more on the Industrial side. From a demand standpoint, the strength and resilience in the Industrial kind of speaks to where we play. We have extremely high share in those markets. And maybe to note versus our peers, some of our peers have cited weakness in -- I think they're calling it consumer industrial. We, on the other hand, put that business into our consumer. We call it the prosumer business, professional audio, video, et cetera. So when comparing us to peers, you'll see that our Industrial may be more pure Industrial.

Operator:

The next question comes from Joshua Buchalter with Cowen.

Prashanth Mahendra-Rajah :

So let me start with fourth quarter. Balance sheet days are up to about 140 and the channel is flattish, and it's still below our desired 7 to 8 target. So the growth in inventory that you're seeing in our balance sheet is coming from a couple of different drivers. Certainly, inflation for our cost of goods, sales growth, which requires us to have more coverage of inventory and then the strategic decisions we made in the prepared remarks. So I do just want to go through that one more time here. So we are temporarily going to hold more finished goods versus putting it into the channel. Because we believe that gives us the flexibility to align the supply with end customer demand across regions and markets. A bad outcome for us would be to give product to a particular distributor who doesn't have an end customer demand for that product, where someone else in a different market or geography is in need. Second, the die bank has really been dried out over the last couple of years. And I think I said, at some levels it's below 50% of where we want it. So die bank for us and for folks who may be less familiar with it, this is a product that has finished the front end, but before it goes to assembly and test. This allows us to get it through the back end in roughly four weeks. So it's quick turn, and it gives us maximum flexibility to put it across different markets. So investing in the die bank will help us get our service levels, which are critical for us given the focus we have on customer service, critical for us to get those levels back up. So the result is, expect higher days in the first half, and then it will trend back down as finished goods burn out and the die bank comes to where we would like it to be. So our goal for the inventory is to get our lead times down to our old target, which was roughly 90% of our goods can be shipped within 4 to 8 weeks. And given the long life of our products, we always carry a pretty minimal risk of obsolescence.

Operator:

The next question today comes from Ambrish Srivastava with BMO Capital.

Prashanth Mahendra-Rajah :

Sure. Yes. Let me just make a comment on cancellation. So we provided cancellations as a metric that we watch in the third quarter because we wanted to give everyone some context that we saw an inflection happening with orders. So it was in the spirit of transparency. However, I don't want to get into a pattern of reporting cancellation data every quarter. So if it was something meaningful, we would have called it out, which we didn't. So you can read that for what it is. I would say that unlike others in the industry, we are proactively analyzing our backlog and working with customers to remove orders that they no longer want given the rapidly changing environment. So this strategy for us is to seek out cancellation. It helps us align our backlog with current demand, and it really gives us better visibility into where the supply needs and what we need to build. So that has increased our confidence in the quality of the backlog we have. It is still -- the coverage is out still over a year, but it is down sequentially. And so while we're always mindful that there can be some continued noise in that backlog, we feel pretty good about both the guide and as we mentioned, the near term.

Michael Lucarelli :

And the question on lead times Ambrish. The lead times actually in the quarter, they have come down. I would say they're still extremely high and much higher than we want them to get. And Prashanth talked about how he wants to -- how he -- or we want to increase our inventory to bring down those lead times, but we have some products that are on time and some products that are lead time to 52 weeks. So lead times have come down overall sequentially from 3Q to 4Q, and that's reflected in kind of our outlook, our backlog, cancellations, everything that we gave you.

Stacy Rasgon :

I had a quick housekeeping question and then a broader one. The housekeeping question, you had an extra week in Q1 '18. So Q1 '23 would be five years later. Is there an extra week in the guide at all? And on the broader question, you talked about some of the OpEx levers that you have. I think last quarter, you talked about like in a 15% revenue down year, you could keep gross margins above 70. I guess the question is do you still believe that? And what would OpEx do in a scenario like that? What are some of the levers you would pull?

Prashanth Mahendra-Rajah :

Okay. And I think your question really is on the downturn scenario analysis. I'll just -- I'll restate that, Stacy. We've covered that a few times, but we put our gross margin floor out there at 70%, and we did that because we have confidence that we have the levers, given the flexibility of our hybrid manufacturing model and the resiliency of our business that it's unlikely that we're going to pass through that. So we’ve tested that at a down 15%. And what we've shared with folks in the past is that a down 15% is quite comfortable that we can stay north of that 70% and the OpEx levers for us would be the -- about 80% of our OpEx is fixed or less variable in nature, which leaves us about 20% on the levers that we can work with to ensure that we keep operating margins north of 40%. I will say that for 2023, our commitment is -- and as Vince often says, we run this company for the long term. So we are committed to continuing to invest throughout the course of '23. We'll, obviously, be mindful of the environment. And if we see a change that warrants us to take action, you can count on us to take action but we -- at least for the next quarter, to expect us to continue to make the right decisions for the long-term health of the business.

Michael Lucarelli :

You read it well, Stacy.

William Stein :

I'm hoping to hit on the inventory question yet again. You've done a very straightforward, good job of explaining to us what's going on in your own inventory. And it sounds like distribution is still below your target even though on their balance sheets across all their suppliers, it looks like they're elevated. But we've seen other parts of the supply chain, in particular, the manufacturing services companies, which I imagine are a big percentage of sort of your counterparty sales on transactions. And I'm wondering to what degree you've scrubbed that half channel, half customer, however you want to look at it, for inventory that could hurt demand going forward?

Vincent Roche :

Yes. I don't think our customers are in the mode of building safety stocks. There are mismatches, I think. There's the well-described golden screw problem. It's probably a base in compared to where it was six months ago, but I don't think customers -- there's no major inventory building going on right now. And I think our customers are doing their best to match their orders and the product supply to be able to create finished goods. So they're not there yet. I think there is still some unserved demand that customers are trying to fulfill. So -- but we're working very closely with our customers. As we've said, we take our signals from sell-through, and we're working with our customers diligently across all 125,000 of them, big and small, to make sure that we get the best match between what they need and what we're able to deliver. And what I'm hearing in general is that, yes, we haven't serviced all the demands that all the customers have needed. But in general, we've been very transparent. Our customers are very pleased with our customer service. And I think it positions us very, very well coming out of the supply crunch to be able to deepen our engagements with our customers and -- both on the R&D side as well as the supply chain side. And customers are increasingly interested to partner with companies like ADI on both of those dimensions, and we're ready.

Michael Lucarelli :

And we go to our last question, please?

Toshiya Hari :

I had one quick housekeeping question and then another broader question. In terms of the housekeeping question, I was curious what did pricing do in fiscal year '22 on a pro forma basis? I think the business grew, what is it, around 25% pro forma. How much of that was pricing? And as you think about fiscal '23 or calendar '23, is the expectation for foundry costs to increase in the out-year as well? And then my broader question is probably for Vince. As you think about the full year '23, based on your backlog, based on your design wins and customer conversations, which end markets or applications are you most excited about in terms of contribution to growth? I realize you run a diverse business, and that's the beauty of ADI. But if you were to single out a couple, where your expectations are the highest, which ones would they be? And which end markets or applications would you be most worried about?

Vincent Roche :

Yes. Thanks, Prashant. So yes, I think in terms of '23, the markets that have been performing very, very well for the company over the last couple of years, particularly Automotive, which we've already talked about; the electrification of the vehicle, we're very, very well positioned there. And we're winning a lot of share in the in-cabin electronics as well, the new display systems, which are very, very complex. The dashboard displays need a lot of very, very clever power electronics. So we're well positioned. From an Industrial perspective as well, digital healthcare has been growing at the company in double digits for over the last 7 years or thereabouts. We expect to see that continue. Also, aerospace and defense, that's likely to be a very brisk business. It's performing well for ADI now, and I believe, at least for the next 5 years, we will see stellar growth in that area. And energy, our energy and sustainability businesses are also beginning to really go on the uptick. So where am I concerned? I'm not really concerned about the business in general, given the diversity that we have, diversity of customers, products, applications. 5G, perhaps, we'll see what is likely to be weakness in Europe, offset by growth in India, growth in ORAN, steadiness in the U.S., and that kind of summarizes how we think about things.

Operator:

This concludes today's Analog Devices conference call. You may now disconnect.

Operator:

Good morning, and welcome to the Analog Devices Third Quarter Fiscal Year 2022 Earnings Conference Call, which is being audio webcast via telephone and over the web. I'd like now to introduce your host for today's call, Mr. Michael Lucarelli, Vice President of Investor Relations and FP&A. Sir, the floor is yours.

Vincent Roche:

Thank you, Mike, and good morning to you, all. Well, I'm pleased to share that we executed very well amidst a dynamic macro backdrop. We delivered another quarter of record results, driven by continued operational excellence, strong financial discipline and resilient demand for our diverse portfolio of innovation-rich products. Revenue was $3.1 billion, up 24% year-over-year on a combined basis and above the midpoint of our outlook. Strength was broad-based with double-digit growth in every end market. Our third quarter profitability reflects ADI's innovation premium and strong operating leverage with gross and operating margins of 74% and 50%, respectively. Adjusted earnings per share of $2.52 finished at the high end of our outlook, marking another new high. I'm exceptionally pleased with our results, and I want to thank our employees for their continued hard work and dedication to our success, and importantly, to the success of our customers. At ADI, innovation is ingrained in our culture, fueled by an unwavering commitment to robust R&D investments. Over the last 12 months, we've invested over $1. 7 billion in R&D. A key facet to our innovation-driven success is our dedication to extensive and deep customer engagements, which enables us to collaborate with them in solving their toughest problems. Now I'd like to share some recent customer highlights. In automotive, we reinforced our market-leading position in BMS with wins at two premium European auto manufacturers. One of these wins was with our wireless BMS solution. This marks the fourth OEM to adopt wireless BMS as customer interest continues to build for this unique technology. In sustainable energy, we announced a design win with Enel Group on the Quantum Edge device used to digitally monitor electric grids. ADI's unmatched precision measurement capabilities are critical to creating a more resilient and flexible grid to help advance efficient electrification globally. In health care, the recently released wireless hospital monitoring system by GE Healthcare in Europe uses ADI solutions across signal chain, power, RF MCUs and sensors. This wearable system enables wireless continuous monitoring to detect patient deterioration earlier, helping to improve outcomes. Today, I'd like to profile our $1.5 billion-plus consumer franchise, a business that plays an important role in our long-term profitable growth strategy. Given the recent negative data points surrounding the consumer end market, one may wonder why highlight this market now. But that's just the reason our consumer business is built differently. In the third quarter, we posted our seventh consecutive growth quarter. And while we are not immune to macro slowdown, we have aligned this business to the high end of the market where performance really matters and into applications where our differentiation is truly valued. The composition of our consumer franchise is indeed unique. Approximately 30% of our revenue comes from long life cycle prosumer applications, including next-generation conferencing systems, professional audio/video and home theater. The remaining revenue in consumer relates to portables, including fast-growing wearables and hearables as well as premium smartphones. Taking a step back, over the last five years-plus, we have reconfigured our consumer business to increase diversity across customers, products and applications to better drive growth and limit volatility while enhancing profitability. The addition of Maxim further enhances our diversity and expanded our portfolio. Over this time, we've increased our product SKUs to just over 10,000 and expanded our customer count to more than 3,000. Importantly, the composition of this business is quite similar to our B2B markets, with no single product contributing more than a couple of percentage points to total ADI sales. The velocity of innovation in the consumer market is appealing. It allows us to accelerate technology development and commercialize solutions quickly at scale. Over time, we take these breakthrough solutions into other markets to create new waves of growth and drive strong profitability and cash flow. For example, we have leveraged our consumer audio expertise into the automotive market. This capability was demonstrated at our Investor Day where we showcased an electric vehicle with Dolby Atmos that uses our Shark DSP and software that was first proven in the consumer business. Additionally, we've also leveraged R&D investments from our core franchises into the consumer market. To that end, our high-precision converters and industrial instrumentation, for example, have been repurposed to solve similar challenges for stabilization in smartphone compass and pressure sensing in wearables. Not only have we created a highly diverse and profitable business but also one that is aimed at key growth drivers that position us to grow at a high single-digit rate over the long term. For example, our prosumer growth has been revitalized as companies implement future of work plans that encompass more immersive enterprise video conferencing. Here, the breadth of our portfolio across DSP, analog, mixed signal and power management enables us to solve the entire customer challenge from high-bandwidth connectivity to video resolution and sound quality. And turning now a moment to the portables market. In hearables, we shift into the majority of premium wireless stereo earbuds. Our newest offerings include software-augmented hearing algorithms and optimized power that reduces size and improves audio fidelity while increasing our value per system by over 3 times. In wearables, we're a leader in personal wellness products with our sensing solutions designed into over 50% of products today. There is a convergence of these personal wellness products and clinical-grade vital signs monitoring solutions that could unlock new opportunities for ADI. And in premium smartphones, we're expanding our share and content at key customers, which is providing us additional diversification and stimulating new growth vectors. An emerging opportunity is the metaverse. ADI's breadth of hardware, software algorithms and domain expertise gives us an ability to provide complete subsystem solutions. While we're still in the early days, of course, momentum is building, and we have design wins in multiple next-generation AR/VR headsets. Across all these consumer applications, power management is becoming ever more critical. Customers are adding more features into smaller spaces, while consumers are demanding longer battery life. Maxim doubled the size of our low-power portfolio and increased our consumer power SAM by over $1 billion. We're already beginning to see the cross-sell benefits of our complementary customer bases and synergistic portfolios with wins in both wearables and conferencing systems. So in summary, I'm very encouraged with the strides we've taken to reignite growth in our consumer business and with a record opportunity pipeline and significant synergy potential, I believe we're in a position to deliver consistent growth over the long term. Now before passing over to Prashanth, I'd like to make some comments on the current business environment. Obviously, the macro backdrop is dynamic and it's clear that we're at an inflection point. Economic conditions are beginning to impact demand with orders showing -- orders slowing later in the quarter and cancellations increasing slightly. Prashanth will provide additional details on these dynamics in his remarks. ADI successfully navigated macro challenges many, many times before in our 57-year history. We've created a premier analog franchise with an unmatched diversity of products, customers and applications. And we've invested in a hybrid manufacturing model that better adapts to demand fluctuations. These characteristics instil a resiliency into our business to mitigate market weaknesses, sustain profitability and enable investment in our business through economic cycles to focus on playing our long game. And with that, I'll hand it over to Prashanth.

Michael Lucarelli:

Thanks, Prashanth. Let's get to the Q&A session. (Operator Instructions) With that, can we have our first question, please, Matt?

Vivek Arya:

I just wanted to clarify how much conservatism is in the Q4 outlook. And then a little bit longer term than that. What happens to the pricing lever as you start to see these bookings start to decelerate? Is pricing holding firm? Is it flat or down as customers start to think about next year?

Vincent Roche:

Yes. Thanks, Vivek. Yes, so I think first and foremost, we are seeing tremendous stability. I don't expect to see any downward pressure on prices even in a recessionary environment. I think first and foremost, our products reflects an innovation premium for the kind of value that we deliver to our customers. Now we're never the long pull in the pricing tent either in the customer's bill of material. The other thing I would say, particularly in the high-performance analog space, the substitution costs are very, very high. So the disruption to a customer system design way, way outweighs considerations for price reduction. So where we obviously compete most intensively on a price basis is to get the original socket, but we have long life cycle products with tremendous stability, very, very high substitution costs. So my sense is that pricing will remain very, very steady through the cycle.

Christopher Muse:

I guess I'd like to focus on the slowdown in orders that you saw at the tail end of the quarter as well as the cancellations that you highlighted. Any more kind of detail you can provide there as it relates to subsegment of end markets, geography? Any color would be greatly appreciated.

Operator:

Our next question will come from Ambrish Srivastava with BMO Capital. Please go ahead.

Prashanth Mahendra-Rajah:

Sure, sure. Thank you, Ambrish. So maybe let's start with a reminder that this company is structurally more profitable than we ever have been. The addition of Maxim gives us the benefit of scale, and we have the benefit of that hybrid manufacturing model, which really gives us that flexibility to manage our production utilizations by being able to notify our supply chain partners in the event we need to, with essentially a quarter's notice, to bring the outside supply number down and focus on keeping internal utilizations higher. As a result of that, we feel very confident that kind of through the downturn of a cycle, we can maintain that 70% gross margin floor, which from an investor model standpoint, is a unique metric that we put out there to give a floor. In thinking about a downturn scenario, and again, I want to emphasize, this is a projection to help investors model what it could be, not in any way a forecast of what we think is coming at us. But from a revenue standpoint, we have this great diversification, 75,000 products, 125,000 customers and thousands and thousands of applications, which are aligned to numerous secular growth markets. We have exposure to much stronger markets in a down cycle like aerospace and defense and health care, which are not going to be as cyclical. On the gross margin side, I mentioned this flexible manufacturing model that allows us to really help manage utilizations. And then we have a very accordion-driven variable compensation program, which allows us to moderate OpEx. So if we were to think about a downside scenario that was in a 15% down revenue market, we believe op margins would still have a 4 handle on them, probably be in the low 40s and gross margins would probably be, again, above 70, but probably in the low 70s.

Stacy Rasgon:

I wanted to delve a little bit more into the bookings and the order. So was it like bookings before were 150% and now they're 130%? Like where is that book-to-bill actually coming in? How far above one is it? And I guess what are you assuming happens to the backlog as we go into next quarter? Are you assuming that, that backlog gets drawn down at all or are you assuming it goes up? Or just what are the assumptions around that embedded in the guidance?

Stacy Rasgon:

What are you assuming in the next quarter for the backlog?

Michael Lucarelli:

I have one thing to that, that's important point Prashanth brought up on the channel is that 31:50 assumes really no channel inventory build. That's a sell-through number that we're guiding to.

Michael Lucarelli:

That's four different parts to that answer, Stacy, so we'll go to the next question.

Blayne Curtis:

I just want to follow up on a part question in terms of just where you're seeing these cancellations. You said consumer and comms are weaker. I think you just said comms book-to-bill is below one. But I'm just trying to understand in the comments of I think channel sell-through was weaker as well. Can you dial us in, is it isolated to certain segments? Or is all of these comments kind of broad-based in terms of where you're seeing the cancellations and the weaker sell-through?

Michael Lucarelli - Head of IR:

But everything we've talked about has been pretty broad-based.

Operator:

Our next question will come from Tore Svanberg with Stifel. Please go ahead.

Prashanth Mahendra-Rajah:

Okay. So I think we've talked through some of that, Tore, but from at least certainly utilization levels, we're going to continue to see relatively good utilization levels across our internal factories for a few reasons

Operator:

Our next question will come from Toshiya Hari with Goldman Sachs. Please go ahead.

Vincent Roche:

Well, I think the last part of your question, first, on pricing increases, I believe that we are in the post-Moore's Law era and in a period of sustained structural inflation in this business for many, many years ahead. I think it's true to say that supply -- we've been increasing, of course. We've invested strongly in our own manufacturing capabilities to be able to secure supply and increase supply actually across the four wafer fabs inside ADI. So yes, supply is improving there. And thematically as well as supply has been improving actually right through the pandemic, right over the last couple of years from our subcontractors as well. So I think there is a lightening of supply across the board.

Operator:

Our next question will come from Harlan Sur with JPMorgan. Please go ahead.

Prashanth Mahendra-Rajah:

Yes. Thanks, Harlan. Your -- first of all, say that you recapped it correctly, and there is some opportunity for us to continue to grow our revenue by bringing distis levels back to our healthy target level. But I want to emphasize that the guide, as Mike mentioned, the guide for the fourth quarter is on the basis of POS equals POA. One thing that ADI has been very consistent about for many years is we run our business on POS. So we need to look at end demand, and end demand drives how we end up manufacturing, and we want distis to be able to help us with access for those products, but we are not looking for distribution to be an excess buffer of inventory.

Operator:

Our last question will come from Ross Seymore with Deutsche Bank. Please go ahead.

Vincent Roche:

Yes, it's a very good question. I've had a lot of conversations, Ross, over the last couple of years with CEOs of the biggest enterprises in the world of information. And what I can tell you for sure is that everybody wants to get closer to their key suppliers when it comes to aligning product roadmaps for the long term. Particularly companies that are perceived as being critical for their innovation processes. So I can tell you that continues. And the other side of the equation is everybody wants to understand at the customer side of things, what do they need to do to secure supply for the long term? And what kind of arrangements that they need to put in place? What kind of information flows? What kind of models that we develop between each other? So that continues. And I think it has been firmly established now that semiconductors are the bedrock of the modern -- of modern socioeconomic life. So the conversations continue intensively, I would say, and I expect that to continue well into the future.

Operator:

This concludes today's Analog Devices conference call. You may now disconnect.

Operator:

Good morning, and welcome to the Analog Devices Second Quarter Fiscal Year 2022 Earnings Conference Call, which is being audio webcast via telephone and over the web. I would like to now introduce your host for today's call, Mr. Michael Lucarelli, Vice President of Investor Relations. Sir, the floor is yours.

Vincent Roche :

Thank you, Mike, and a very good morning to you all. Well, I'm very pleased to report that ADI delivered another quarter of record revenue, profitability and earnings, driven by continued insatiable demand for our products, strong operational execution and accelerated synergy capture. Moreover, amidst a dynamic macro environment, we're operating from a position of remarkable strength, supported by our record backlog, robust bookings and ongoing capacity expansions, which position us favorably as we enter the second half. Now moving to a summary of our results. Revenue was $2.97 billion, above the high end of our outlook and up 28% year-over-year on a pro forma basis. Strength was broad-based with all segments up double digits year-over-year. Impressively, adjusted gross margin expanded to 74% and operating margin to 50%. Adjusted EPS was $2.40, exceeding the high end of outlook and increasing over 50% from the year ago period. Overall, I'm very excited with our performance and our team's outstanding execution. Today, I'd like to reinforce what we shared at our Investor Day around how our markets are evolving and how we're investing to solve more of our customers' problems while also improving on our business model that's both rich with growth opportunities and, indeed, resiliency. The next wave in the evolution of the ICT sector is the nascent Intelligent Edge revolution. It will be characterized by ubiquitous sensing, hyperscale computing and pervasive connectivity, pushing processing and intelligence closer to the edge. Semiconductors are the bedrock enabling this next wave. And ADI, where data is born, is at the center of this revolution. At our core, we're an innovation-driven enterprise over the last decade through both robust organic investments and strategic M&A. We've built the industry's broadest and highest performance analog, mixed signal and power portfolio. Our offerings span from microwave to bits, nanowatts to kilowatts, sensor to cloud and increasingly from components to subsystems. Our vast arsenal of technologies, along with the deep level of engagement and support we provide our customers, has earned us the number 1 positions in analog, mixed signal, RF and high-performance power. This, coupled with our focus on customer success, awards ADI with an innovation premium that is reflected in our ASPs that are more than 3x the industry average and also industry-leading gross margins. The growing scope of our customers' products is dramatically expanding in complexity and pressuring their product development teams and innovation cycles. To meet these challenges and deliver the next wave of disruptive innovations, we're investing over $1.6 billion in R&D annually. These investments strengthen our broad market franchise and enable us to expand our SAM and vertical applications where more complete solutions are necessary. We achieved this by integrating our core analog technologies with increasing levels of digital algorithms and software. Now let's look at how our technology is intersecting with our markets. Industries like transportation, energy, telecoms, manufacturing and health care are prioritizing digitalization. This is driving new generations of applications and fueling a host of concurrent secular growth trends, and I'd like to touch on just a few now. Starting with automotive. Here, ADI is the market leader in battery management systems, for example, for EVs. Our battery management systems, or BMS, solutions offer customers the highest levels of accuracy, reliability, safety and security. Our wireless BMS solution offers all the benefits of wired but also enables rapid battery pack configurability and cost-effective scaling of our customers' EV fleets. This innovative solution continues to gain traction in the market and adds to our content per system by up to 2x. Moving to communications, where ADI is the market leader in radio signal chains for 5G with a majority share across the ecosystem. Our latest generation transceiver includes a fully integrated digital front end and grows our SAM by 2x. This innovative radio architecture reduces system cost and waste and improves power efficiency. Further, the flexibility of these software-defined solutions allows them to be used across traditional 5G networks as well as an emerging Open RAN and LEO satellite networks. Lastly, health care. We have a number 1 position with dominant share in medical imaging, for example. Subsystems like our photons to bits module are used by the top CT players in the world. Our solution delivers the highest-fidelity images while decreasing radiation dosage. And in the process, it allows us to capture 4x the SAM compared to offering just components alone. In addition to expanding our innovation edge across these secular trends to amplify growth, the Maxim combination creates a $1 billion revenue synergy opportunity for us over the next 5 years. The first opportunity arises from customer cross-selling, leveraging our complementary relationships to pull through our extended portfolio. Second is fusing together the new product road maps of these 2 premier Analog portfolios to push the boundaries of what's possible. And third is power management. Here, the combination with Maxim increases our breadth of power capabilities, creates a more cost competitive portfolio and adds to our engineering talent pool. As a result, we unlocked $4 billion of additional power SAM and look to double our power revenue in the years ahead. The proliferation of the Intelligent Edge and our revenue synergy opportunity gives me great confidence that we can bend the growth curve upwards, moving from our historical mid-single-digit growth rate to our new model of 7% to 10%. Now I'd like to speak a little to the unique resiliency of our business. The diversity of our portfolio is a source of great strength. We shipped 75,000 product SKUs, which support thousands of applications to over 125,000 customers. Notably, 80% of our revenue is derived from products that individually contribute no more than 0.1% of total revenue. And the longevity of our products is unmatched. On average, our products have life spans of a decade or more, effectively delivering recurring revenue streams for decades. It's these characteristics that create a high barrier to entry and an enduring business model. Finally, we utilize a geographically diverse hybrid manufacturing strategy to attain the complexity and fragmentation of the Analog market. This strategy provides us with a broad array of technology and packaging necessary to create innovative solutions from 7 nanometers to 7 micrometers. At the same time this model creates a diverse network of internal and external partners to best manage our operations through economic cycles. As we mentioned at our Investor Day, we're investing in our internal manufacturing operations to build a more robust and cost-effective model. To that end, we're doubling the capacity of our internal factories and adding significant capital to our product test operations. These investments will grow our output this year and into 2023 and increase our swing capacity across our network to over 70% of revenue. So in closing, ADI is a leader in innovating at the edge, and I believe that our best days are still ahead of us as we drive increased value for our customers, shareholders and society. And with that, I'm going to pass it over to Prashanth, who will take you through the financial detail.

Michael Lucarelli:

Thanks, Prashanth. Let's get to our Q&A session. [Operator Instructions] With that, Katrina, can we have our first question, please?

Tore Svanberg:

Congratulations on all the record results, especially on that 50% operating margin. My question is for Vince. Vince, towards the end of your remarks, you talked about growing output to increase swing capacity to 70% of revenues. Could you perhaps elaborate a little bit on that? And what is sort of the time line exactly for when you would hit that number?

Operator:

And your next question is from Stacy Rasgon with Bernstein Research.

Prashanth Mahendra-Rajah:

Thank you for the question. So as you know, we, along with the rest of the industry, has been passing along the higher costs. We have been very focused on not using this environment to take advantage of our customers but to really maintain our gross margins. So in '21, we had some headwind from the timing of inflation versus when we were able to enact the pricing. This has really abated in '22. So really, the gross margin percentage and the growth in gross margin percentage that you see is really being driven, as I mentioned, by the synergies, great utilization at the internal fabs and some mix benefits. I think in my prepared remarks, I talked about industrial hitting 51% of the overall revenue mix. So for the forward look, we updated our model just a couple of weeks back, and we feel very comfortable that in a typical cycle trough, we are going to be able to maintain a 70% floor. Beyond that, we will continue to make the right trade-offs with opportunities to expand the top line and -- at some trade-off on gross margin. So really the focus for the team is deliver the revenue growth and let that leverage drive all the way down through cash flow. So I wouldn't encourage folks to look for significant margin expansion. These are already pretty incredible numbers.

Prashanth Mahendra-Rajah:

Yes, that's the right way to think about it, yes.

Operator:

And your next question is from Vivek Arya with Bank of America Securities.

Vincent Roche:

Yes. Thanks, Vivek. So first and foremost, it's a highly diversified industrial business that we've been diligently investing in from an R&D perspective, from a customer engagement perspective over the last decade or 12 years with a renewed focus. We've been gaining share very, very clearly. I think our portfolio, particularly combined with the power activity as well from the LTC and Maxim acquisitions puts us in even better stead to capture more SAM essentially. And to your question on growth, I would say that we -- during the Investor Day, we said that the new model is 7% to 10%. So I think industrial is going to be right in there somewhere over time. And we feel more confident now, I think, about our industrial growth than we've ever done, just given the strength of the portfolio, the customer engagements and so on. And in terms of the signals we watch, obviously, we have a lot of conversations with our customers. I personally have had a stream of conversations with many of our largest industrial customers over the last quarter. And I think what they're all trying to convey to us is that things are different. We're moving into a new industrial cycle, Industry 4.0, 5.0, IoT, or I beg your pardon, IT and OT, if you like, colliding in a new partnership for the future, driving a lot of new technologies. So that's one, obviously 1 stream of input we get. The other signals we look at, obviously, are the PMIs, the machine to builders indexes and so on and so forth. Well, I think the greatest source of insight for us is our own knowledge of the end applications coupled with our customers' insights.

Operator:

Your next question is from C.J. Muse with Evercore.

Prashanth Mahendra-Rajah:

Yes. Maybe I'll start and then hand to -- hand over to Vince. So on the tactical side, we are working on getting additional capacity both from our external partners as well as the investments we're making internally. So you'll see that continue to play out over the course of the year, which is why I mentioned in the prepared remarks, look for us to continue to grow sequentially through this year and likely at least into the early part of next year. We talked about pricing that has been a little bit incremental to the revenue growth. So that's certainly a piece of it. And the demand has just been very broad-based. And again, I said it in my remarks but to be clear, we are seeing demand across all end markets and all geographies. It's very evenly spread and strength across all end applications. So we do feel, to Vince's remarks here, we do feel very well positioned and our technology is really starting to hit the sweet spot across all of our customers. And then maybe I'll pass here to Vince to add some more.

Operator:

Your next question is from Ambrish Srivastava from BMO.

Prashanth Mahendra-Rajah:

Yes. Thanks, Ambrish. Two good questions, and thanks for giving me the opportunity to clarify. So first, on synergies. We had talked, when we did the Maxim closed that we had some great learnings from LTC on how to get to synergies and that was to move fast and hard, and you're seeing us execute against that strategy. So we captured basically the entire $275 million that we originally committed to as we exited our second quarter. And that at Investor Day, we said we're raising that target to $400 million, and we'll hit that number coming out of -- or as we exit 2023. That first $275 million was a little more tilted towards cost of goods, and the following piece will sort of be balanced between cost of goods and OpEx. So as you look forward, that's how to think about the balance of that. To your question on the comments I made, thank you for giving me a chance to clarify. We have used our pricing opportunities to maintain gross margin. So to be clear, we're not looking at pricing as an opportunity to expand gross margin but really as a way to offset. So when I said abate inflation, I meant versus the historical inflation that we had experienced in 2021. It took us a little bit longer to get those pricing actions in place. So now we have neutralized them and you see that benefit in the current year. And of course, if we do continue to see price increases -- sorry, cost increases in the coming quarters, expect us, like the rest of the industry, to respond by pushing those through.

Michael Lucarelli:

Ambrish, this is Mike. Yes, as we had talked about earlier, going forward, that 74% will bounce around, like you said, mixed utilization of the 2 drivers. And then as Prashanth outlined, that [1 25] does have a COGS element in it that will also help gross margins. But if you go forward 74%, plus/minus, I feel pretty good about that.

Ambrish Srivastava:

Right. You've been very consistent about that.

Chris Danely:

So with all this talk on revenue growth, your forecasted sequential revenue growth for July is the slowest in a couple of years. Can you talk about why that's happening? And is that because of COVID shutdowns or something else? And then as part of that, with all this focus on increasing capacity, I would assume your capacity is growing faster than the 2% or 3% sequential revenue growth. So can we assume that the lead times are coming in this quarter as well?

Chris Danely:

Perfect.

Prashanth Mahendra-Rajah:

Yes. I think we can give everyone the data point that on a sequential basis, think of it as 50-50. The growth is coming from pricing versus units. So that falls into the baseline sequentially as we go forward, pricing falls into the baseline.

William Stein:

I’ll add my congratulations to the very strong revenue and profitability and the outlook as well. That was great. But despite all that good stuff, there’s a few factors that investors are certainly concerned about potentially disrupting bookings and potentially revenue performance, of course, the war in Ukraine, the COVID shutdowns in China and raising rates. But there’s also a concern maybe not as prominent, but – that we’ve picked up on, which is customers adjusting orders, potentially ancelling or pushing out because they’re very challenged from a kitting perspective. You highlighted yourself that you’re capacity constrained. Can you help us understand how those factors are affecting your business today and how you anticipate them playing out in your business over the next few quarters?

A –Prashanth Mahendra-Rajah:

Yes. Just the numbers. Well, the book-to-bill is above 1 in the second quarter, and that was, again, by all end markets and geographies. Because of that, the backlog continued to grow. You asked specifically about China. So real quickly, that’s about 20% of our revenue. And the lockdowns had some impact on customer production, but it was really more severe around logistics and the supply chain related to the greater Shanghai area. Our China revenue was up quarter-over-quarter and year-over-year and no notable impacts to demand. Again, cancellations normal, and as I mentioned, book-to-bill above 1 for China. So when our guide reflects that most customers are operating at relatively normal levels and we consider this dynamic, so we think that at least for the third quarter, it’s going to be a negligible impact.

A –Michael Lucarelli:

We’ll go to our last question, please.

Prashanth Mahendra-Rajah:

Toshi, are you on? Toshi may be on mute. Do we have 1 more in the queue?

Operator:

Our next question is from Gary Mobley with Wells Fargo Securities.

Prashanth Mahendra-Rajah:

Yes. Gary, a fair question. The -- as Vince mentioned, we look at a number of external indicators. So we are mindful of what's happening in the macro environment. But as you mentioned, the conversations that he has with our customers continue to support their need for our products and that we are attached to the right secular driver. So I do want to clarify, you had said sequential growth for the next 3 to 4 quarters. I can't see out that far, Gary. I feel good about the next 2 to 3 quarters sequential growth, but I'm not sure I want to go out further than that at this point.

Operator:

This concludes today's Analog Devices conference call. You may now disconnect.

Operator:

Good morning and welcome to the Analog Devices First Quarter Fiscal 2022 Earnings Conference Call, which is being audio webcast via telephone and/or the web. I’d now like to introduce your host for today’s call, Mr. Michael Lucarelli, Vice President of Investor Relations. Sir, the floor is yours.

Vincent Roche:

Well, thanks, Mike, and good morning to everybody. So once again, ADI delivered another record quarter, marking a strong start to the year. Our continued success was driven by our unparalleled high-performance portfolio and our team’s strong operational execution and intense customer focus, enabling us to better meet the growing demand for our products. Now, looking at our first quarter results, revenue was $2.68 billion, up more than 20% year-over-year on a combined basis. Growth was broad-based, with all segments up double-digits year-over-year, led by industrial and automotive. Gross margin expanded to 72% and operating margin increased to over 45%. Adjusted EPS was $1.94, up 35% year-over-year. Now, it’s been nearly 6 months since we closed the Maxim transaction, overall, we have made great progress on the integration to-date. The feedback we have received from customers and our teams has been overwhelmingly positive and we have taken important steps to strengthen our operations. In the many exchanges I have had with our customers, they have expressed their enthusiasm for the combination recognizing the increased value that ADI and Maxim together bring to the market. Broadly speaking, ADI is viewed as a trusted, long-term focused partner that takes a customer-first approach to our engagements. We offer a unique combination of best-in-class engineering and unmatched domain expertise, with a high-performance portfolio that spans from microwave to bits, from nanowatts to kilowatts and from sensor to cloud. This is enabling us to develop more complete solutions that define the edge of possible. The acquisition of Maxim increases the breadth and depth of our high-performance portfolio, especially in power management. Here, our more comprehensive power portfolio allows us to better address opportunities across industrial, automotive, datacenter, connectivity and consumers. Similar to the cross-selling activity we implemented with the LTC portfolio, we are aggressively identifying areas to attach this power portfolio with ADI’s leadership positions in analog, mixed signal and RF. And with our extended sales and field organizations, we are better positioned to uncover cross-selling opportunities and serve existing and new customers who have an increased need for application and design support at a solutions level. I have also been highly engaged with our teams across ADI. The combination has unleashed excitement throughout the organization. There is a burning desire to capitalize on the numerous opportunities to accelerate revenue growth. And I am already seeing firsthand the benefits of our collaboration, from operations, to engineering, to sales, making me excited for what’s ahead. Turning firstly to our manufacturing operations, the analog sector is characterized by fragmentation, with diversity across products, customers, applications and markets. To tackle this complexity, we utilize a hybrid manufacturing strategy, providing us with vast capabilities across technology, processes and packaging necessary to create innovative solutions from 7 nanometers to 7 microns for our 125,000 customers. The combination with Maxim enhances our hybrid manufacturing model by enabling a more diverse network of internal facilities and external partners. This increases our access to technologies and capabilities, which in turn expands the scale and the scope of our offerings. We are investing in our internal manufacturing operations to build a more robust and cost effective model. To that end, we are expanding the footprints of our Oregon and Limerick fabs and adding significant capital to our test operations at our facilities in the Philippines, Thailand and Malaysia. These investments will grow our capacity this year and into 2023, provides seamless product qualifications for our customers, and give us greater optionality between our internal facilities and foundry partners. Now ahead of our Investor Day in April, I’d like to preview some of the secular growth trends that make us most excited about the future of our industry and for our company. In the industrial market, we are seeing the compounding effect of many concurrent secular trends. For example, our instrumentation business, which is comprised of automated test equipment, electronic test and measurement and scientific instruments, is aligned with growth trends from connectivity, to EVs, to sustainability. The growing technology complexity of these applications requires ADI’s more advanced metrology solutions, enabling us to continue increasing our SAM. Our factory automation business is empowering another critical trend of more intelligent and connected factories. Here, we support tens of thousands of customers of all sizes with our precision signal chain, power management, sensing technologies, and robust wired and wireless connectivity solutions. In automotive electrification, we are the global leader in battery management systems for EVs, with double the market share of our nearest competitor. We are continuing to build momentum globally. And in the last quarter, we have recorded several new design wins from premium European auto manufacturers. Electrification is not exclusive to the automotive sector. There is a necessary shift to sustainable energy sources to deliver the environmental benefits of electrification. This vision requires green energy generation with a smart grid, which digitally monitors and adjusts performance and also energy storage systems, which mitigate intermittency issues related to variable user demand. ADI supports this infrastructure with control and sensing technologies as well as accurate monitoring and efficient power conversion to ensure the grid parameters remain stable. Within automotive, we are also seeing manufacturers create a more immersive human experience by digitalizing the cabin. This requires increased bandwidth, lower latency and more efficient power management, creating new opportunities for ADI’s connectivity and power portfolios. For example, our audio system solutions with signal processing, A2B connectivity and road noise cancellation provide customers with the highest fidelity solution while also reducing the vehicle’s weight. In addition, our GMSL franchise and functional safety certified power management solutions are critical in architecting and efficiently powering advanced driver assistance systems. Overall, our market-leading positions in BMS, audio systems and GMSL, combined with our complementary customer bases, position our automotive franchise to deliver strong growth in the years ahead. Turning now to advanced communications networks, in wireless, ADI’s market leading software-defined transceiver portfolio is enabling next-generation communication systems from traditional 5G, to O-RAN, to low earth orbit satellites. And we are expanding our SAM with the industry’s first transceiver that includes a fully integrated digital front-end. In wireline, our optical control and power portfolios are critical to tackling the exponential growth in bandwidth and compute power of carrier networks and hyperscale datacenters. Here we see a large and underserved opportunity for ADI. So with that backdrop, we look forward to expanding on these areas and more at our Investor Day with our senior leadership team. So in closing, ADI is the leader in innovating at the edge. We have an industry leading high-performance portfolio that continues to benefit from the acceleration of mass digitalization across industries. And with Maxim, our portfolio has increased in breadth and depth and we see even more opportunity than ever to capture additional market share. And I am very optimistic about what our future holds. And so with that, I will hand you over to Prashanth who will take us through the financial details.

Michael Lucarelli:

Thanks, Prashanth. Let’s get to the Q&A session. [Operator Instructions] With that, we have our first question, please.

Vivek Arya:

Thank you for taking my question. And good to see the strong execution. Vince, I was hoping you could maybe give us a readout of what you see as kind of the supply-demand balance in your different end markets. And if – as part of that, if you could help us understand what role is pricing playing in the industry today. And can it be sticky over time? Or will it need to revert back as there is more trailing-edge capacity that comes online, including from your other large U.S. competitor?

Vincent Roche:

Yes. Vivek, just to add a couple of other color comments here. So we have historically managed our pricing to reflect the value that we deliver to our customers. We get an innovation premium for our products. And also, we have very, very long life products in our portfolio. And customers pay us to keep security of supply for the long-term. And that’s an approach that we intend to keep in perpetuity. I think also, pricing for us is more structural than cyclical. I think the last couple of years have really brought semiconductors from the background into the foreground and shown the importance of semiconductors to the modern digital economy. And I think customers understand the value in a more meaningful way. So I think, as Prashanth said, cost inflation, we’re in the post-Moore’s Law era, cost inflation, I think, is going to be a long-term facet of the economic dynamic of the semiconductor business. So I expect that cost increases will moderate, but there will be inflation, I think, for the medium to long-term here. So I think when you put it all together, the industry is in a better place to capture more of the value that it’s been generating over these many, many decades. And then I think we will benefit from that as a company based on the quality of our innovation, but also the new dynamics in the industry.

Operator:

Thank you. Our next question will come from the line of John Pitzer with Credit Suisse.

Prashanth Mahendra-Rajah:

John, let me just set the numbers on that. So this year, pricing or – actually, I should say, for the current quarter, pricing counts for less than half the growth. So that kind of helps you size it. And we had said on the prior quarter’s call that in 2021, we had cost increases that were coming at us faster than we were able to push price out because we were in the process of closing the deal on Maxim and beginning the integration. So we did expect more pricing tailwind this year because we actually had inflationary cost headwind last year.

Michael Lucarelli:

Thanks, John. Next question please.

Pradeep Ramani:

Hi, thanks for taking my question. I just wanted to ask about your automotive business just given how automotive production is sort of sharply rebounding in 2022. How do you feel about how much your automotive business can outgrow SAAR or even production in 2022? How should we think about that? Thank you.

Michael Lucarelli:

Thank you.

Toshiya Hari:

Hi, good morning. Thanks so much for taking the question and congrats on the strong execution. Prashanth, I wanted to ask about your synergy capture in the quarter and how to think about synergies going forward. In your prepared remarks, I think you talked about earlier than expected synergy capture. Should we consider this as kind of a pull-in of synergies, or would it be fair to assume that the Phase 1 target of $275 million is a little bit more on the conservative side? And then, I guess additionally, on Phase 2, I realize it’s kind of early. But you had talked about potentially looking at your manufacturing footprint similar to how you did with the linear. Is that still the plan, or could things change given the stronger demand backdrop? Thank you.

Toshiya Hari:

Got it. Thank you.

Stacy Rasgon:

Hi guys. Thanks for taking my questions. I wanted to ask about gross margin. So, I hear what you are saying on pricing. It sounds like it’s a revenue boost, but not so much a margin boost yet. But I just look at the company, ADI standalone was kind of 70 to maybe low-70s, Maxim was kind of mid to high-60s. And you are doing 72% out of the gate. Is this mostly just utilization and mix and the synergies? And it sounds like you have got more synergies coming. You have got revenue going through the year. Should we be thinking about the current gross margin level you just put in Q1 as sort of being the bottom for the year as you continue to progress?

Michael Lucarelli:

Gross margins, Stacy, and how it trends, we don’t guide gross margins, but I will give you some context around. If you look at 2Q, it’s usually up a bit. That’s embedded in our outlook. In the back half, usually about flat from there. That kind of helps you from a kind of near-term 2022 outlook. And then at the Investor Day, we will talk more about the long-term outlook for the business.

Operator:

Our next question will come from the line of Tore Svanberg with Stifel.

Vincent Roche:

Yes. So thanks, Tore. The – well, first off, if we just take it from a high level, first, we have always utilized a hybrid manufacturing model at ADI. And it gives us the reach of process technology and capabilities that we need to support the sheer breadth of our portfolio, which is more than 75,000 unique product sets. And we are supplying 125,000 customers. So, I think when we think about the long-term, we will continue to use the benefits of this hybrid model for optionality, resilience and the availability of technology. So overall, the business that we are in, it is – and given that we are approaching the world with a hybrid mentality, our business is less capital intensive. And it also gives us, as I said, resiliency in terms of gross margin and long-term access to more options for process technology, etcetera, etcetera. So, I will hand it over to Prashant. He will make a few comments on the investments that we are making and how we are going to strengthen that model.

Tore Svanberg:

Great. Helpful. Thank you.

Operator:

Thank you. Our next question will come from the line of Ambrish Srivastava with BMO Markets.

Prashanth Mahendra-Rajah:

Yes, great question, Ambrish. So first, let me say that you are absolutely right. There is a bunch of purchase accounting that is flowing through the balance sheet. So, the inventory numbers probably have a bit more noise, and we can handle that with your team offline. But let me high level kind of help folks to think about the inventory. So, the channel remains very, very lean. That is not the – not our balance sheet, but the inventory in the channel, that remains very lean, well below our seven-week to eight-week target. We are having difficulty building inventory in the channel. We get it into the channel, and it moves out very quickly. Within ADI’s books, our days of inventory are up slightly, primarily, as I mentioned that we are planning to see revenue increase sequentially for the balance of the year. So, you have the raw material and the WIP is in – is sort of in the middle of the process now before that comes out, and that is – that’s up. We also had a little bit of finished goods up, but that was purely timing on when the quarter ended versus where the goods were in the transit process. So, I wouldn’t read anything into our increase in finished goods, except to say it’s just – it happened to be when the Drawbridge closed for the quarter.

Operator:

Alright. Our last question will come from the line of Harlan Sur with JPMorgan.

Michael Lucarelli:

I will answer backwards. I will start with kind of the sizing of data center for you. If you look at our comms business, it’s about 15% of total revenue. That’s split about evenly between wireless and wireline, about 50%, 50% in each of those. And if you look at the wireline piece, that’s where data center is embedded, it’s probably about 30% to 35% of that relates to the data center. What do we ship into this, I know you outlined it pretty well. I am not going to go through it again. But I will pass it to Vincent and Prashant, probably Vince to talk a little bit more about what the opportunity is in data center and why we are excited.

Harlan Sur:

Great. Thank you.

Operator:

This concludes today’s Analog Devices conference call. You may now disconnect.

Operator:

Good morning, and welcome to the Analog Devices Fourth Quarter and Fiscal Year 2021 Earnings Conference Call, which is being audio webcast via telephone and over the web. I'd like to now introduce your host for today's call, Mr. Michael Lucarelli, Vice President of Investor Relations. Sir, the floor is yours.

Vincent Roche:

Thank you very much, Mike, and a very good morning to you all. Well, once again, we delivered record revenue and profits in our fourth quarter, closing out what was a milestone year for ADI. Our success was driven by our industry leading high performance portfolio and our team's strong operational execution, enabling us to better meet the insatiable demand for our products. Now stepping back a little. 2021 truly demonstrated the vital importance of semiconductors to the modern digital age. We invested ahead of this inflection, building a comprehensive portfolio to better solve our customers' most complex problems in this ubiquitously sensed and connected world. As we enter 2022, our backlog and bookings remain robust and we continue to invest in manufacturing capacity, positioning us well for another successful year ahead. Now moving on to our results. Our fourth quarter revenue was $2.34 billion and EPS was $1.73, both exceeding the midpoint of guidance. And for 2021, our revenue was $7.32 billion and EPS was $6.46. Looking at our organic ADI. We delivered new high watermarks on revenue and profits. Industrial and automotive achieved record revenue this year, while consumer returns to annual growth for the first time since 2017. And communications revenue declined its continued strength and wired was offset by weakness in wireless related to the China market. In 2021, we generated a record $2.4 billion of free cash flow, equating to a free cash flow margin of approximately 33%. This maintains our position in the top 10% of the S&P 500. In line with our revised capital allocation strategy to return 100% of free cash flow, we returned $3.7 billion to shareholders in 2021 through dividends and share buybacks. It was not only a record year for performance and shareholder returns but also for investments that position us to better capture market opportunities presented by secular growth drivers in our business. First, we took decisive action to add capacity throughout the year with more than $340 million in capital expenditures. This is enabling us to better navigate the near-term supply/demand imbalance while achieving our long-term growth objectives. And in 2022, we're planning to expand our internal manufacturing capacity at our factories in the US and Europe. These additional investments will create more profitable, flexible and resilient manufacturing capabilities at ADI. Now at our core, we're an innovation driven enterprise. And together with Maxim, we will invest more than $1.6 billion in R&D annually to ensure we continue developing solutions that define the edge of possible. As you know, to complement our organic efforts, we selectively use M&A to expand both our scale and our scope. In 2017, the acquisition of LTC reflected this strategy. Since acquiring the franchise, we delivered on our goal to double its historical growth rate. Equally impressive was our ability to improve on Linear's industry leading gross margins. More recently, we completed the acquisition of Maxim Integrated. Similar to previous acquisitions, we're combining the best from ADI and Maxim to develop a new operating system that enhances customer engagement and drives long term profitable growth. And I'm very pleased with the progress that we've made already. On the customer engagement side, the integration of our field teams has brought a tremendous degree of excitement. The team is already beginning to identify cross selling opportunities and building out our opportunity pipeline. From an engineering and operations perspective, our teams are coming together at a remarkable speed and we're aligning product and technology road maps to help accelerate growth in the years ahead. This combination also strengthens the diversity of our portfolio and enriches our resilient business model. To that end, we now have approximately 75,000 product SKUs and 80% of these products individually account for less than 0.1% of our total revenue. And the addition of Maxim provides us with a more comprehensive power portfolio, Maxim's primarily application focused power offerings are highly complementary with ADI's more general purpose or catalog power portfolio. This adds new SAM in all our markets and enhances cross selling opportunities, accelerating revenue growth in our $2 billion-plus power portfolio. Given these investments, we entered 2022 with an unparalleled portfolio of technology and talent aimed at capitalizing on the secular growth trends across all our markets. And now I'd like to share a few examples of how our business is at the heart of these emerging trends, starting with industrial. 2021 was a better year for our highly diversified and profitable industrial business with all applications achieving all time highs. Our unrivaled high performance portfolio continues to benefit from the mass digitalization movement across industries. Our largest industrial segment, instrumentation and test, is comprised of automated test equipment, electronic test and measurement and scientific instruments. These applications must combat increasing test times as system complexity and metrology requirements rise exponentially. For example, processors in memory and data centers are leveraging finer node geometries with higher levels of integration, which can double the test time. This challenge is our opportunity. Our innovative, purpose built solutions are bringing test time back to parity while increasing our content by more than 50%. Factory automation is one of our largest industrial segments. I believe we're at a tipping point in the Industry 4.0 as customers are looking to add sensing, edge processing and connectivity to make their supply chains more robust, efficient and, of course, flexible. ADI's precision signal chain and power franchises, sensing technologies and robust wired and wireless connectivity are critical to enabling these efforts. Looking ahead, we have an enormous opportunity to connect Maxim's rich power portfolio, which is underrepresented in the industrial sector today with ADI's strong position. Shifting now to automotive. In a year dominated by chip shortage headlines, we achieved record revenue as consumers and manufacturers are embracing electric vehicles and an enhanced in-vehicle experience. These two areas need additional semiconductor content and align very well with the strengths of both ADI and Maxim. In electric vehicles, our market leading wired and wireless battery management systems, or BMS, offer customers the highest levels of accuracy, reliability and safety as well as flexibility to scale across all battery chemistries, including the more environmentally friendly zero cobalt LFP. Our BMS position is further strengthened with Maxim. We now sell to seven of the top 10 EV manufacturers and our increased technology and product scale enables us to address new SAM. Our efficiency is also critical in electric vehicles to better optimize performance and range. Here, Maxim's strong and growing power management capabilities complement our portfolio. Now inside the vehicle, automakers are enhancing the in-cabin experience. ADI's market leading audio systems with signal processing, A2B connectivity and active road noise cancellation continues to gain traction. In 2021, our A2B franchise was designed in at five major OEMs. And since its launch in 2016, we've shipped over 50 million A2B nodes, and we expect this to double within the next three years. With Maxim, our in-cabin connectivity offerings expand to include their industry leading GMSL franchise, which is critical in architecting advanced driver assistance systems. Turning to communications. 2021 was an uneven year as strength in wired was offset by weakness in the China wireless market. Encouragingly, as we look to 2022, the proliferation of 5G is gaining momentum globally, especially in North America. In the wireless market, ADI is the leader with more than double the market share of our closest competitor. This year, we introduced the industry's first software defined radio transceiver that includes a fully integrated digital front end. This next generation transceiver platform enables us to defend and extend our position in traditional 5G and emerging O-RAN networks. Additionally, Maxim's power portfolio will support our goal to increase our power attach rate in the wireless market. In our wired business, we grew again this year as data centers and networking became increasingly vital to accelerating digitalization. Maxim more than doubles our exposure to data centers and adds new growth vectors with its power management solutions for cloud processors and accelerators, and momentum is building with a strong pipeline across traditional customers as well as hyperscalers. Finally, moving on to consumer. Our business delivered double digit growth this year as we executed on our strategy to diversify our customers' products and applications. Maxim further builds in these efforts, bringing additional power, audio and sensing capabilities and adding new applications like fast charging and gaming. Given the strong pipeline and design wins for our signal processing solutions across hearables, wearables and professional audio video, combined with our power management capabilities, I'm confident that we're on the path for continued growth. Now I'd like to focus on ESG just a little, which is now an integral part of our business strategy. Broadly speaking, I believe semiconductors can play a major role in improving our standard of living while also protecting our planetary health. For example, ADI's technology is critical to optimizing global energy efficiency from EVs and charging stations to sustainable energy and smart grids. We're not only investing in these applications, but they represent a meaningful and growing portion of ADI's revenue today. So we've made substantial progress on our ESG initiatives in 2021, including a commitment to increase the use of sustainable energy for 100% of our organic ADI manufacturing activities by 2025, up from 50% today. Actions like these will help us achieve our goal of carbon neutrality by 2030 and net zero emissions by 2050. We launched the Ocean and Climate Innovation Accelerator Consortium focused on the critical role of oceans in combating climate change. And we've enhanced our disclosure and transparency in ESG topics, especially around diversity, equity and inclusion. In the year ahead, we look to extend our ESG initiatives across the combined company and, of course, make further progress toward our goals. So in closing, I'd like to thank our employees and partners who worked tirelessly throughout this past year, helping ADI achieve these historic results. We're off to a strong start in 2022 with continued robust demand and line of sight to capacity additions. And I've never been more optimistic about ADI's future. Our industry leading position is stronger with Maxim as we expand our capabilities to capitalize on emerging secular drivers positioning us for faster growth in the years ahead. And with that, I'll hand you over to Prashanth.

Michael Lucarelli:

Thanks, Prashanth. All right. With that, let's get to our Q&A session. [Operator Instructions] With that, we have our first question, please.

John Pitzer:

Congratulations on the solid quarter. Vince, Prashanth, if I exclude kind of the Maxim revenue in the October quarter, the core ADI business just came in line with the midpoint of your original range, which is clearly not horrible. But just given strength of business and kind of your pension to tend to give upside and the view that maybe Maxim was more supply constrained than ADI. I'm just wondering if you can help us understand that dynamic and maybe it's getting rectified in the January quarter being guided above seasonal. But were there supply constraints in the quarter that impacted either revenue and/or margins? And any kind of conversation around that would be helpful.

Operator:

Your next question comes from Toshiya Hari with Goldman Sachs.

Prashanth Mahendra-Rajah:

Why don't I take pricing, and I'll let Vince kind of speak how we think about it longer term. So the short answer is, for 2021, we've been talking about rising cost inflations over the course of the year, and we've been raising our prices with the goal of neutralizing the impact to margin. I would say that in the fiscal year that just finished, cost increases and price increases were not completely synchronized. So it's very likely that cost inflation outpaced our pricing actions for the year and we're likely a modest headwind to the year. As we go into 2022, we're looking for the inverse of that. We're looking for pricing net of inflation to be a modest tailwind to the year as the price increases that have begun -- begin to get more traction. And we believe that while we still will have some cost increases over the course of the year, most of those are now baked into the run rate.

Operator:

Your next question is from Tore Svanberg with Stifel.

Vincent Roche:

I mean, there are many, many. I think I mentioned in the prepared remarks, for example, that Maxim is very underrepresented in the industrial space where ADI is very, very strong. Half our business, total business is industrial, and it's a very, very small part of Maxim's business. And where I see the opportunity there is really on the power side of things, power management, in particular. It's the fastest growing segment in the analog space. And I think generally, across the board, we're still underrepresented as a company in power. We today have approximately $2.3 billion, $2.4 billion of combined power revenues. My sense is we can double that in a reasonable period of time. And we'll give a lot more detail on that when we get to the Investor Day over the next couple of months. And from an application and market standpoint, I'd just like to point to data center. You know the power management solutions that Maxim has for companionship with cloud processors, AI machines, accelerators and so on, I think will combine very nicely with ADI's data center micromodules. And then in automotive, connectivity, Maxim's GMSL high speed link technology used in our in-cabin connectivity portfolio, will enable us to optimize solutions and address a lot more applications in the car. And that's a nice companion as well to ADI's A2B connectivity solution for audio. And last but not least, Maxim has added a lot of heft to our BMS portfolio and our portfolio now is double the size it was pre-Maxim. And as I mentioned, again, in the prepared remarks, we now sell to seven out of the top 10 OEMs in the electric car area. And there's a lot more examples but they are the primary ones I'd like to point out at this stage.

Vivek Arya:

Vince, I just wanted to get your perspective on the shape of kind of fiscal '22 sales growth. Your Q1 outlook implies, I believe, about 19% pro forma sales growth, that's well above your closest Analog peers with an acceleration from Q4. And if I were to assume that Q1 is kind of the low point of the year and you grow supply sequentially, that points to a double digit sales growth. So I know you're not giving full year guidance, but are we thinking about it the right way? And what could be the puts and takes from a supply and then also a mix perspective as we go through the year?

Prashanth Mahendra-Rajah:

Vivek, maybe just double clicking on the supply item to provide clarity. We put in a fair amount of equipment orders for the legacy ADI operations. So we expect ADI capacity to continue to increase quarter-on-quarter over the coming fiscal year. On the Maxim side, we've done the same, but those orders only went in when the deal closed. So given the long lead times from the semi-cap guys, we're probably unlikely to see a meaningful increase in Maxim's ability to supply until the tail end of the year. So unfortunately, I think Maxim, from a fiscal year basis, will probably be a little bit of a drag on growth just because we can't get the tools fast enough.

Ambrish Srivastava:

I just wanted to say thanks to Mike for providing all the web schedule that really goes a long way in transparency. So I really appreciate that. My question is on lead times and the expedites. I just wanted to see what you're seeing versus what TI highlighted, which was very different than what we've heard from other companies. So specifically, are you seeing expedites narrow down and then where are your lead times? So I think in the last earnings call, you had mentioned or in my call back, you had mentioned that you had 25% hotspots. So color on those would be helpful.

Vincent Roche:

I think briefly from my perspective. The number of conversations that I've been having with customers certainly hasn't slowed down. And in these conversations, it's pretty clear to me that what we're being requested to support as real demand. So our customers are trying to get products out the door, and they're not building inventories at this point in time.

Prashanth Mahendra-Rajah:

It depends on the product, and it depends on the market. So we have some areas where they continue to extend and others that have stabilized. So overall, lead times are above normal and it's not where we want them to be. But it's very product and market specific given the diversity of what we make and where we make it.

Operator:

Your next question comes from Stacy Rasgon with Bernstein Research.

Vincent Roche:

So Stacy, the way to think about the cost synergies is we said roughly 40% in the coming fiscal and then the balance in 2023. The majority of the coming fiscal will actually be in cost of goods. And then in 2023, you'll see that flip to be the majority of that coming in OpEx. What else can I tell you there -- anything else [Mike] that's relevant…

Stacy Rasgon:

Also what’s the proper sort of like current like folding run rate for OpEx right now?

Prashanth Mahendra-Rajah:

On gross margins, the -- so first quarter seasonally tends to be a little bit lower because we have the holiday shutdowns and this first quarter here will have a full quarter of Maxim, which as many of you know, had lower gross margins than stand-alone ADI. So we've got some headwind coming from that. The tailwind is we've got the revenue that's coming in strong and pricing, as I mentioned earlier, is going to be -- start to be mildly accretive. So all in, I would think gross margins kind of sequentially, I think, flattish is a safe model.

Operator:

Your next question is from Harlan Sur with JPMorgan.

Prashanth Mahendra-Rajah:

I think it probably looks to be continued hand to mouth for the next couple of quarters. Our inventory numbers are a little bit confusing because of some of the map that's in there. So I'll just go back to what I said in the prepared remarks. Days of inventory was down slightly. The internal inventory balance was up as we built raw materials and WIP. You have some noise in there from Maxim's inventory being added into our middle of the quarter as well as the purchase accounting math, which requires us to do a step up of that. So adjusting for all of that, we were up slightly in terms of ADI balance sheet inventory and most of that was in WIP. On the channel side, it remains very lean and well below where we want it to be, and that causes some challenges on customer service as it does for everyone in the industry. We don't see that abating at least for the first or second quarter, and it's hard for us to see further out than that.

C.J. Muse:

I guess a question on supply and gross margins. As you look at fiscal '22, can you speak to the growth you anticipate from internal versus external supply? And then based on that, how should we think about the implications to your gross margins?

Vincent Roche:

I think the best answer we can give you, C.J., is that we've indicated we expect gross margins to increase throughout the year. And we've got a hybrid model. So we expect to -- against that, we're not expecting any kind of external, internal prohibitions that will impact gross margin but we expect it to increase throughout the year.

Prashanth Mahendra-Rajah:

Happy Thanksgiving, everyone.

Operator:

Good morning. And welcome to the Analog Devices Third Quarter Fiscal Year 2021 Earnings Conference Call, which is being audio webcast via telephone and over the web. I'd now like to introduce your host for today's call, Mr. Michael Lucarelli, Senior Director of Investor Relations. Sir, the floor is yours.

Vince Roche:

Thank you, Mike. And a very good morning to everybody. So, ADI delivered a second consecutive Quarter of record revenue and earnings, despite the challenging supply environments. Our strong performance was driven by continued operational excellence and insatiable demand as semiconductors power the modern digital age. Broadly speaking, the economic recovery continues to take shape with demand still far exceeding supply. We, like many others in our industry, will face a constrained supply environment into 2022. Despite this backdrop, our business continues to achieve record results as our investments and design win over the last few years are matched with strong demand across our end markets. So looking ahead, the combination of robust bookings, lean inventories, and ongoing capacity additions position ADI to close Fiscal '21 on a high note and continue to grow in the next year. So moving to our third-quarter results, revenue was $1.76 billion up 21% year-over-year. All markets increased sequentially with industrial and automotive once again, achieving the record. The gross margin expanded to over 71% and the Operating margin over 43%. Adjusted EPS of $1.72 increased 27% year-over-year. Despite elevated capital spending to increase our capacity, free cash flow over the trailing 12 months was $2.2 billion. This equates to a 34% free cash flow margin, maintaining our position in the top 10% of the S&P 500. Overall, I'm very pleased with our performance and our team's outstanding execution. As you know, at ADI, our ethos of innovation and deep customer engagements ensure that we stay ahead of what's possible. We invest more than a billion dollars annually in R&D focused on strengthening our core franchises and capturing market opportunities presented by sector growth records, which have accelerated the economic recovery. Now, let me share some recent highlights with you. Our industrial business is our most diverse segment across customers, products, and applications and features sticky long product lifecycles. Our largest industrial segment, instrumentation, and test, is comprised of automated test equipment, electronic test and measurement, and scientific instruments. This is truly a performance-driven market that aligns perfectly with our high-performance precision Signal Chain, Power management, and RF portfolios. Importantly, instrumentation and text are aligned with all secular growth trends from connectivity to EVs to sustainability. The growing technical complexity of these applications required more testers with more advanced performance capabilities. Today, ADI is the leader in communications tests. And we're collaborating with Keysight, for example, to advance the development of O-RAN solutions. This partnership will enable the fastest path for the design and cost-effective and power-efficient radio units. Looking ahead, we're already beginning to partner with our customers to test emerging 6G technologies. Our innovations in the instrumentation market also have a positive impact on human and planetary health. One particular area is our environmental monitoring business, where there's an increased need for highly reliable and accurate instruments to improve the standard of living globally. Our market-leading portfolio of precision converters enables 10 times greater measurement resolution of fine particulate matter, better identifying trace pollution. The next largest industrial segment is factory automation. Over the last year, many of our customers are rethinking their factory flows and supply chains to make them more resilient, cost-effective, and flexible through automation and connectivity. To achieve this, our customers will further automate their businesses with intelligent and connected factories, and increase their use of robots and cobots. Specifically, cobots require ADI's precision signal chain and power franchises sensing technologies, and robust wired and wireless connectivity. This new vector of growth increases our sum opportunity by three times that of a traditional robot. To that end, our precision motion control business is on track for a record year of design wins, including a recent win at a leading Japanese robotics Company for its next-generation robots. In addition, we are leveraging our domain knowledge and system-level expertise in a collaboration with Universal Robots to design smaller, smarter, and easier-to-use robots that help scale tasks safely and transform workforces. We're turning now to our Communications business. 5G is beginning to broaden globally, especially in North America, as carriers look to deploy newly acquired C-band spectrum and all-round continues to gain momentum also, with several of the largest European carriers setting ambitious 2025 all-round deployment targets. This includes Vodafone where our technologies are very well represented. This quarter we extended our market-leading position in 5G radio solutions with the introduction of the industry's first software-defined transceiver that includes a fully integrated digital front end. Our innovative radio architecture greatly improves power efficiency, thereby reducing radio weight, size, and carrier expenses. This high level of integration eliminates FPGAs to simplify implementation and facilitate the proliferation of these emerging O-RAN networks. Our next-generation receiver platform is already designed at a major Tier-1 global supplier that is gaining share in this 5 G and O-RAN deployments across North America as well as Europe. Stepping back, we expect our communications business to return to growth in 2022. We have strong design momentum and our geographic mix has shifted with North America, Europe, and Korea representing our largest sources of revenue. Moving now on to automotive. Over the last 2 years, we've realigned our business to focus on electrification and the in-cabin human experience. We're seeing the benefits of this strategy as we continue to scale our market leadership in battery management, power management, audio systems, and connectivity. Starting firstly with our battery management systems or BMS, our wired and wireless portfolios provide unmatched accuracy to deliver market-leading vehicle range and can measure all key battery chemistries, including zero-Cobalt LFP. Additionally, our solutions incorporate ASLD functional safety and an ultra-low power continuous monitoring feature that ensures the battery remains stable even while parked, which is a first in the market. In addition, this quarter marked the first time we recognized revenue for our wireless BMS solution as General Motors prepares to ship its first of 30 EV models powered by the OTM battery platform. And this is just the beginning of this groundbreaking BMS technology as OEMs realized the power of wireless data in scaling their fleets. Turning to audio systems and connectivity. As complexity continues to increase, there's a very strong demand for our market-leading audio systems with signal processing. A2B connectivity, and active road noise cancellation. Our solutions offer the highest fidelity performance in the market while reducing vehicle weight, removing nearly 100 pounds per vehicle. During quarter 2 leading OEMs adopted A2B and a Top 3 European vehicle manufacturer implemented A2B as its audio connectivity standard across its entire fleet. In total, A2B is now designed in over 30 OEMs, including 18 of the top 20 global automotive Companies. Furthermore, interest in our active road noise cancellation feature continues to intensify. We're designed in at 9 OEMs, up from 5 just a year ago, including Hyundai and a leading EV manufacturer. The gadget capability can more than doubled the value of our A2B solution. These are just a few of the countless examples of the tremendous work underway at ADI. We remain focused on delivering breakthrough innovations to stay ahead of our customer's needs. So in closing, I have never been more confident about ADI's future. Over the last decade, we've built an industry-leading portfolio with unparalleled breadth and depth of capabilities that are aligned with more profitable end markets. And our portfolio and leadership position will only get stronger with the acquisition of Maxim, enabling us to deliver strong returns in the years to come. And so with that, I'll hand you over to Prashanth.

Mike Lucarelli:

Thanks, Prashanth. Let's get to our Q&A session. We ask that you limit yourself to 1 question in order to allow for additional participants on the call this morning. If you have a follow-up question, please re-queue and we will take your questions if time allows. With that, to our first question, please.

Vivek Arya:

Thanks for taking my question. Once you mentioned demand far exceeds supply, I was hoping if you could help us quantify that. Are you under-shipping by 5%, 10%? How much of a demand cushion does ADI have right now? And kind of Part B of that is how much incremental capacity are you planning to bring online in the next year and is that kind of a proxy for what kind of sales growth we should be looking at? Thank you.

Vince Roche:

Yeah, I think the second part of that question, Vivek, just a little bit of color. So, we're leering an investment in CapEx to support our growth objectives, particularly on the backend of our operation, assembly, and test. And we need this capital now to meet the demand, but also in the longer term, we're very, very optimistic about the tailwinds right across our business, from automation to electrification, connectivity, and so on and so forth. The outlook we've just given you supplies feasible and it is certainly the governor, I would say, right now on revenue for the Company.

Mike Lucarelli:

Thanks, Vivek. We go to the next question, please.

Tore Svanberg:

Yes. Thank you. I was hoping you could just elaborate a little bit more on the Maxim merger. You said that you'd still expect it to happen within the timeframe you had announced. I believe you had said the summer of 2021, correct me if that was wrong. And related to that is, again, China the only remaining obstacle before you can close the deal?

Tore Svanberg:

Great. Thank you for that, Vince.

Operator:

Your next question is from John Pitzer of Credit Suisse.

Vince Roche:

Yes. Thanks, John (ph). First and foremost, I'd like to remind everybody that ADI's industrial business is built on a foundation of many individual market segments like automation, instrumentation that I talked about, healthcare, our space business, and energy, as it moves to renewables and charging infrastructure, for example, the whole need for grid efficiency and stabilization. So that's the foundation. It's a highly diverse business. We've got many tens of thousands of customers. And, you know, the lifecycles in the business are 15 years plus. And it's a very, very, very sticky socket that we've got. So, those of you who followed ADI for a long time, remember about a decade ago, we fairly dramatically increased our focus in terms of R&D, go-to-market activities, in ensuring that we could really grow that business. And the last years have shown that we've been getting market share across the board there. So I think there were a lot of programs that were stalled last year, so there's a certain amount of catch-up there. But I do think that the breadth of the portfolio that we know has the investments we've been making in terms of customer engagement, R&D activities, and the secular trends that we've got all these concurrent secular drivers are propelling that business beyond the market.

Operator:

Your next question is from Stacy Rasgon of Bernstein Research.

Prashanth Mahendra-Rajah:

Yes. Thanks for the question, Stacy. So I would say that for the results that we printed, pricing is net-neutral. We're passing on cost increase so that we're not impacting margins, but we've made a decision not to take advantage of our customers by structurally increasing pricing in this environment. Our long-term model is unchanged and that is 70% plus. So the goal really is to drive the revenue growth and make the trade-offs that are necessary to drive that revenue growth. Focusing on delivering on the top margin and the free cash flow. So you'll see, if you back out the IP license impact, we had a 71.2% gross margin in the third quarter. And while we don't guide to gross margins, if you impute it from the guide that we gave you, the fourth quarter is going to probably be a record for ADI in terms of gross margins.

Mike Lucarelli:

Thank Stacy. Next question.

Toshiya Hari:

Hi guys. Good morning. Thanks for taking the question. I wanted to ask about the comms business. Vince, you talked about 2022 being a growth year, and you talked about North America, Europe, and Korea being the key drivers for you guys going forward. How should we think about the shape of the recovery going forward? Is it going to be a fairly gradual recovery? Could it be sort of a V-shaped recovery over the next couple of quarters? And when you talk about the return to growth in '22, what's sort of implicit assumption are you making for China? Thank you.

Vince Roche:

Yes, Toshiya, why do I have the confidence I have about 2022 being a strong growth year? So maybe I can unpack that a bit for you. So I think our comms' revenue mix is seeing a benefit from the rest of the world beginning to emerge in 5G. So today, the rest of the world outside of China is 3x in terms of the term. So that's number 1. If you look at then the geographies of North America, the auction to C-band auction's complete. Revenue's really just beginning here. And all the indications are that 5G revenue here will accelerate in 2022 and indeed beyond. Europe, it's -- I would say, a step behind, but we're beginning to see good signs of life in that region but I think it'll be a more elite 2022 driver. We've talked several times in various calls here about O-RAN, what's happening, but we're beginning to see revenue. We've talked before about Rakuten in Japan, that business continues to accelerate. And European carriers are looking right in to make it also an important part of their 5G offering. I mentioned during the prepared remarks as well that Vodafone is a major player there and we happen to be very well represented in their systems. And I'm also having conversations with customers about the use of 5G and O-RAN beyond the classical consumer market. So it's early days, but the characteristics of flexibility, scalability, quicker time-to-market, cost savings, and so on, are enabling private Networks to be configured in factory environments, for example. So that's all still on the comm, but that gives you a sense of our confidence in 2022 and beyond.

Toshiya Hari:

Thank you. We'll go to the next question.

Ambrish Srivastava:

Hey, thank you. Good morning, folks. I have a question about Maxim. And so my investment case for ADI has not been Maxim and you have a very sticky shareholder base who have been with you before Maxim, but I get this question a lot, so I think it's a fair question to ask. If Maxim was not to go through, what do you think about capital allocation? Do you then go back to the playbook and say you would be changing how you think about capital allocation or you would continue on the M&A path and look at other opportunities? Thank you.

Vince Roche:

Yes. So as you know, you've seen over the years, we've always acquired very, very high-quality assets, and that will remain to be our view on things in the years ahead as well.

Mike Lucarelli:

Thanks. Ambrish. Next caller.

Blayne Curtis:

Hey, good morning. Thanks for taking the question. Just curious if you looked at the B2B guidance, it's fairly flat, as I think industrial probably is flat given the slug segment guidance you gave. I'm just kind of curious as you look at this. Obviously, you had strong comments on the bookings. Is that gap really supply or are you starting to see demand tends to start to settle out at this level?

Blayne Curtis:

Thanks and I just want to follow up on the gross margin, Prashanth. So you indicated the gross margin would be up and I think that's with the license impact as well. So you saw a benefit from the linear. I was curious how much more there is of that as a benefit. And then maybe just talk about utilizations and another pulling gross margin as you look over the next couple of quarters.

Vince Roche:

You know, the foundation for our gross margins being where they are, It's the number 1 innovation. We produced the best performing solutions between the physical and digital worlds and we got a premium. We got very, very well paid for doing that. Also, the diversity of our products and customer portfolios, 125,000 customers with I think I've said this before, 85% of our sales come from products that individually contributed less than 0.1%. And the pricing environment, as we said earlier on the call, has been very, very stable, very steady.

Operator:

Your next question is from Harlan Sur of JPMorgan.

Prashanth Mahendra-Rajah:

Yes. Thank you, Harlan Sur. I'll take that. So first, a couple of comments on inventory. Inventory on our balance sheet is up year-over-year and sequentially, but that is exclusively due to raw materials and width. We can't keep a finished good in stock. So when it's produced, it either goes to the customer or it goes into the channel, and then it goes out of the channel immediately. So we are struggling to build finished goods inventory both in ADI warehouses as well as in our channel partners. Roughly, let's say a significant amount of our auto business is on consignment which gives us good visibility for that direct business as to what's happening there. And that is also we are seeing that demand pull through pretty quickly and no opportunity for those auto customers to build the inventory within their warehouses, but that's on our books. So it's still very much hand-to-mouth and the focus that we have as we've talked throughout this call and in the prepared remarks is on increasing our capacity or ability to supply by making some significant investments in capacity. I don't see this balance coming into some sense of normalcy until sometime in calendar year '22.

Mike Lucarelli:

All right. We'll have our last question, please.

William Stein:

Great, thanks for taking my question. You just talked about inventory not coming to some level of ability to rebuild anything until sometime in '22, you talked about the supply debate about lasting. We're well into '22, which put you up to the bill, etc. When we look out to the next quarter, the January quarter, typically, that's a sequentially down quarter in automotive, industrial, consumer, and for the whole business as well. But given these supply constraints of this very significant backlog, should we think about that seasonality as different in the coming year? Should we expect maybe some visibility to sequential growth for the next several quarters? Thank you.

Mike Lucarelli:

Yeah, sure. I guess if you look back, you're right. We talk about seasonality not being as meaningful now, but just give you a bit of a history lesson. If you look past over the past 10 years, you're right, our B2B markets, I would say in good times, which I would call now good times, it's usually flatted down slightly in 1Q and consumer, I will say in good and even normal times it down 5% or maybe more in 1Q. And with that, I want to thank everyone for joining the call this morning. A copy of the transcript will be available on our website. And all reconciliations and additional information can also be found in the Quarterly Results section. Thanks again for joining and your continued interest in ADI.

Operator:

Good morning, and welcome to the Analog Devices Second Quarter Fiscal Year 2021 Earnings Conference Call, which is being audio webcast via telephone and over the Web. I'd now like to introduce your host for today's call, Mr. Mike Lucarelli, Senior Director of Investor Relations. Sir, the floor is yours.

Vince Roche:

Thank you, Mike, and good morning to you all. So I'm very pleased to share with you that we delivered record revenue and earnings in the second quarter, exceeding the high end of our outlook. This strength was driven by our disciplined operational execution and our ability to capture the value presented as our solutions become more vital in the modern digital economy. The supply and demand dynamics in our industry have been well publicized. Broadly speaking, the economic recovery has materialized faster and stronger than initially anticipated, placing unprecedented stress on supply chains globally. Late last year, ADI moved with speed and agility, proactively making capital investments to add capacity, positioning us to navigate this disruption and better serve our customers. That said, we, like many others in the industry, will face a supply constrained environment through the balance of 2021. Despite this backdrop, we're positioned for a strong second half as our continued capital investments are aligned with robust demand. Moving to a summary of our results. Revenue was $1.66 billion, increasing 26% year-over-year. The strength was broad based, highlighted by record quarters for our industrial and automotive markets. Gross margin expanded to nearly 71% and operating margin to approximately 42%. Adjusted EPS of $1.54 increased 43% year-over-year. Over the trailing 12 months, we generated $2.2 billion of free cash flow. This equates to a record 36% free cash flow margin, maintaining our position in the top 10% of the S&P 500. So overall, I'm very proud how the ADI team executed this quarter to deliver these impressive results. At ADI, innovation is the root of how we generate value. And to maintain our virtuous cycle of innovation driven success, we invest more than $1 billion in R&D annually. This commitment coupled with the diversity of our business across customers, products and applications, positions us to deliver long-term profitable growth. Now let me share a few customer highlights with you. ADI solutions are embedded across the electrification ecosystem from developing and managing the vehicle battery to the distribution and storage across the digital grid. With the rapid shift to EVs, we're seeing new and increasing investments in battery manufacturing capacity. This quarter, we secured a design win with the supplier of one of the world's top battery producers. Our innovative solution reduces system cost by half by integrating all measurement, control and diagnostics functions. And our portfolio of wired and wireless BMS provides unmatched accuracy to deliver market leading vehicle range as we grow and diversify our BMS business. This quarter, we added Volvo as well as three additional large auto manufacturers, including a prominent luxury brand in Europe and two leading brands in Asia. Moving on to energy infrastructure. Here, energy storage systems are required to make renewable energy a reality and to build the charging infrastructure to support EV proliferation. Our precision Signal Chain Power management and BMS portfolios delivered the level of accuracy necessary to ensure a consistent supply across the digital grid. We have design wins of more than 80% of the top customers, from traditional energy and industrial companies to new entrants. Another area of increasing importance for ADI’s connectivity, which of course is becoming more pervasive across demographics and industries, presenting new opportunities for us. For example, in our communications business, we announced the complete radio platform for the 5G O-RAN ecosystem. This radio platform builds on our market leading integrated transceiver position by expanding into the digital frontend. Our full system solution enables significant size and performance improvements, while reducing customers’ design cycles. O-RAN represents a new vector of growth in the communications market by enabling new entrance and applications, such as private networks that support connected factories. In addition to the partnerships with Intel and Marvell, we are working with key carriers and system integrators to enable this ecosystem. In our space business, our beamforming solution will be used in Telesat Lightspeed LEO satellite constellation scheduled to launch in late 2023. This win speaks to the breadth and depth of our RF portfolio and domain expertise at ADI, which is supporting the adoption broadly of LEO communication satellites. Additionally, we continue to have strong design momentum across our diversified industrial market, the largest, stickiest and most profitable business at ADI. Over the years, we've established a heritage of providing the most precise and efficient solutions required by our factory automation customers. I believe we're at a tipping point in Industrial 4.0 as customers are looking to add sensing, edge processing, and connectivity to make supply chains more robust, more efficient and flexible. We recently won an ultra-high frequency wireless solution at a key automation company. Our solution is being used in advanced robotic systems to reduce downtime and costs. On the wired side, customers are beginning to upgrade to deterministic Ethernet to ensure machines are constantly connected and monitored. This quarter, we secured numerous design wins for a robust Ethernet solution, including two of the largest European industrial machine manufacturers. We recently hosted a deep dive on our instrumentation and test business. This is truly a performance-driven market that requires ADI’s most advanced technology and solutions, making it a great fit for our high-performance precision Signal Chain Power and RF portfolios. Our broad diverse instrumentation business comprised of automated test equipment, electronic test and measurement and scientific instruments is aligned with all secular growth trends across our industry. The increasing complexity of these applications is driving the need for solutions with more advanced technology capabilities. As a result, we expect our SEM to increase by over 20% in the next five years. Now these examples represent only a fraction of the incredible work across ADI. Our team is partnering with our customers everyday to develop increasingly innovative technologies that not only create successful business outcomes, but also enrich people's lives and leave a greater impact on our world. To that end, I wanted to share an exciting update on how we're leveraging innovation to advance our mission of Engineering Good. In April, we launched an innovation accelerator with the Woods Hole Oceanographic Institution. As part of this program, we'll be combining ADI’s engineers and technologies with WHOI’s science and technology platforms to continuously monitor critical oceanographic conditions. This effort supports our overall climate agenda, which includes our commitments to achieving carbon neutrality by 2030 and net zero emissions by 2050. We also published our 2020 Corporate Responsibility Report last week, which provides additional information on how our technologies will continue to play a major role in improving our standard of living, while protecting our planetary health. So in closing, the last year has underscored how semiconductors as the bedrock of the modern digital economy and information age are increasingly important to accelerating digitalization across all industries. We're encouraged by our results this quarter, and the momentum in our pipeline sets the stage for continued profitable growth in the years ahead. So with that, I'll hand you over to Prashanth who will take you through the financial details.