Good morning, and welcome to the Analog Devices' Third 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.

Thank you, Kevin. And good morning, everybody. Thanks for joining our third quarter fiscal 2024 conference call. With me on the call today, ADI's CEO and Chair, Vincent Roche; ADI’s CFO, Richard Puccio. For anyone who missed the release, you can find it in the related financial schedules and investor.analog.com. Onto the disclosures, information we're about to discuss includes forward-looking statements which are subject to certain risks and uncertainties as further described in our earnings release and our periodic reports and other materials following the SEC. Actual results could differ materially from the forward-looking information, as these statements reflect our expectations only as of the date of this call. We undertake no obligation to update the statements except as required by law. Revenue, adjusted gross margin, operating and non-operating expenses, operating margin, tax rate, EPS and free cash flow in our comments today will be on a non-GAAP basis, which excludes special items. When comparing our results to historic performance, special items are also excluded from prior periods. Reconciliation of these non-GAAP measures to the most directly comparable GAAP measures and additional information about our non-GAAP measures are included in today's release. And with that, I'll turn it over to ADI's CEO and Chair, Vince.

Thanks very much, Mike, and a very good morning to you all. The stronger demand for our high-performance product portfolio and skillful execution resulted in third quarter revenue of more than $2.3 billion, operating margin north of 41%, and EPS of $1.58, all above the midpoint of our outlook. These favorable results, combined with improved customer inventory levels and order momentum across most of our markets, increase my confidence that our second quarter marked the cyclical bottom for ADI. My optimism remains guarded, however, as challenging economic and geopolitical conditions are limiting a sharper recovery. We continue to balance near-term fiscal discipline with strategic investment in our long-term growth initiatives, positioning ADI to capitalize on the extraordinary opportunities that we see ahead. Now I'd like to draw attention to our industrial end market, which is our largest, most diverse, and most profitable business, generating durable revenue streams that last close to two decades on average. As our business begins to recover from the pandemic's volatility, we're excited about the tremendous long-term growth opportunities in the industrial market. We offer our customers an unparalleled suite of high-performance solutions stretching from antenna to bits, sensor to cloud and nanowatts to kilowatts. Our extensive technology portfolio, combined with our deep domain expertise and engineering muscle, has enabled us to secure leading positions across the most attractive industrial sectors. Now, with growing digital software and algorithmic capabilities augmenting our cutting-edge analog portfolio, ADI is strongly positioned to solve our customers' most difficult challenges in factory and process automation, energy efficiency, secure connectivity and many more. To illustrate the power and potential of our industrial franchise, let me share with you a few examples of how our recent innovations are unlocking new revenue streams and positioning us for strong growth in the years ahead. For example, our Instrumentation and Test business, which includes scientific instruments, electronic test and measurement, and automated test equipment is essential to the important scientific and technological advancements of the digital era. Within automated test equipment, our next generation solutions increase channel density and throughput while reducing energy consumption by up to 30% per system. These are crucial parameters for testing complex, high-performance compute GPUs and high bandwidth memory systems for AI. As the AI infrastructure build-up remains a priority for global hyperscalers, we expect growth to continue into 2025 and indeed well beyond. Turning now to Aerospace and Defense, which has been our most resilient business during this downturn, ADI's domain expertise and high-performance portfolio across orphan microwaves, high-speed and precision converters, power and MEMS uniquely position us to deliver complete edge solutions offering our customers scale, velocity and lower total cost of ownership. As an example, we're building upon our programmable Apollo signal chain platform today to create full software defined RF communications and sensor systems, which has the potential to increase our sound by five times in commercial, defense and aerospace communication systems. Indeed, we see a path to double-digit revenue growth in this sector in 2025, fueled by several high value design wins that are going to production. In Automation, though we've seen a slow recovery to date, we remain strongly confident in its future growth potential as the benefits of increased productivity are ever clearer. Customers are prioritizing enhanced digitalization and IT/OT integration on their factory floors. Their deployments of in-line instrumentation and advanced robotics are driving the need for more sensing, edge processing, secure connectivity, and car management. Within robotics, we're seeing a progression from fixed-arm machines to autonomous and mobile robots to eventually humanoid robots. This evolution creates additional opportunities for a precision signal chain franchise. And sensing, connectivity, and motion-controlled subsystems with fully isolated and efficient power solutions can drive content from hundreds of dollars in robots today to thousands in autonomous and humanoid robots. What is additionally exciting about these advances is their broad applicability beyond factories, such as surgical robots and imaging systems in healthcare. ADI's products can dramatically improve a surgeon's effectiveness through a more precise surgical experience with lower latency connectivity. Additionally, patients gain the potential benefits of shorter hospital stays and fewer complications. The evolution in robotics is expected to unlock billions of dollars of potential opportunity for our high-performance analog, mixed signal, power connectivity, and sensing solutions. We see the potential for a doubling of our robotics revenue in the years ahead. Turning now to Energy Transmission and Distribution, our customers are modernizing and digitalizing the electrical grid to respond to exponentially accelerating energy demand driven in part by the proliferation of electric transportation and rapid AI adoption. This process is resulting in a grid that is distributed, dynamic and bidirectional, a paradigm shift from the past model of linear stable supply. We're working with traditional suppliers and disruptors to enable the necessary intelligence for the new grid from decentralized power plants to the distribution edge. We're leveraging our analog and algorithm capabilities in cutting-edge energy monitoring and management solutions. Additionally, our battery management technology increases capacity and improves energy utilization in the grid's renewable energy storage systems. This reimagined intelligent grid of the future has the potential to expand our return by over $10 billion and creates tailwinds for our energy franchise for many years to come. Given the synergies across our industrial portfolio, our pace of innovation and the emergent signs of market recovery, we're optimistic for our industrial business that has turned the corner and 2025 will be a robust growth year. So in closing, our investments in high-performance analog solutions are enabling us to intersect with and leverage the numerous concurrent secular trends that transcend the business cycle and will propel us into the future. Our commitment to our customers' success and to impactful innovation will be the path that carries us there, ultimately increasing long-term shareholder value. And so with that, I'm going to turn it over to Rich, who'll take you through the numbers.

Thank you, Vince. And let me add my welcome to our third quarter earnings call. Third quarter revenue of $2.31 billion came in above the midpoint of our outlook, finishing up 7% sequentially and down 25% year-over-year. Industrial represented 46% of revenue in the third quarter, finishing up 6% sequentially and down 37% year-over-year. Every major application increased sequentially except for automation, which declined at a much slower pace than it had in previous quarters. Automotive represented 29% of revenue, finishing flat sequentially and down 8% year-over-year. We saw continued double-digit growth year-over-year for our industry-leading connectivity and functionally safe power platforms. Conversely, automotive production cuts are extending inventory digestion across customers, particularly impacting our legacy automotive and electrification businesses. Communications represented 12% of revenue, finishing up 10% sequentially and down 26% year-over-year. Slowing customer inventory digestion enabled both wireless and wireline growth sequentially. And lastly, Consumer represented 14% of revenue, finishing up 29% sequentially and increased year-over-year for the first time since 2022. We saw diversified growth across applications with notable strength in portables and gaming. Now let's move from the top line to the rest of the P&L. Third quarter gross margin was 67.9%, up 120 basis points sequentially, driven by higher revenue, higher utilization and favorable mix. Operating expenses in the quarter were $619 million, up modestly sequentially, driven primarily by higher variable compensation. Operating margin of 41.2% exceeded the high end of our outlook. Nonoperating expenses finished at $70 million and the tax rate for the quarter was 10.8%. The net result was EPS of $1.58, which finished near the high end of our outlook. Our financial position is solid and I'd like to call out a few items from our balance sheet and cash flow statement. We ended Q3 with more than $2.5 billion of cash and short-term investments and a net leverage ratio of 1.2. Inventory decreased $51 million sequentially and days declined to 178 from 192. As planned, we reduced channel inventory further this quarter with weeks ending near the low end of our 7 to 8 week target. Operating cash flow for the quarter and trailing 12-month was $0.9 billion and $4 billion respectively. CapEx for the quarter and trailing 12-month was $154 million and $1 billion respectively. For fiscal ‘24, CapEx is tracking to our $700 million plan, which is down roughly 45% versus 2023 as our hybrid manufacturing investment cycle tapers. Not included in these figures are the anticipated benefits from both the European and U.S. CHIPS Act. During the last 12 months, we generated $2.9 billion of free cash flow or 30% of revenue. Over this same time period, we have returned $2.8 billion via dividends and share repurchases. As a reminder, our strategy is to return 100% of our free cash flow to our shareholders over the long term. Now I'll turn to the fourth quarter outlook. Revenue is expected to be $2.4 billion plus or minus $100 million, up 4% sequentially at the midpoint. We expect sell-through to be roughly equal to sell-in this quarter. At the midpoint on a sequential basis, we expect industrial and consumer to increase, communications to be flattish and automotive to decrease. Operating margin is expected to be 41% plus or minus 100 basis points. Our tax rate is expected to be between 11% and 13% and based on these inputs, EPS is expected to be $1.63 plus or minus $0.10. In closing, our third quarter results and fourth quarter outlook support our view that we have passed this cycle's trough. However, challenging economic and geopolitical conditions are limiting a faster demand recovery. I will now give it back to Mike for Q&A.

Thanks, Rich. Let's get to 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 a follow-up question, please requeue and we'll take your question if time allows. With that, we have our first question, please.

Our first question comes from Tore Svanberg with Stifel.

Yes, thank you so much. Great to see the turn here. Vince, could you maybe elaborate a little bit more on this sort of mixed environment, right? Because inventories have bottomed, access to inventories have bottomed, at the same time end demand seems to be kind of mixed. So, as you navigate through this period, could you elaborate a little on your visibility, how's backlog trending? Are you finally starting to see new products ramping more into production? Because these are typical signals that you want to see at the beginning of a new cycle.

Yes, thanks, Tore. Well, I'd say first and foremost, we run this company on POS signals. That's how we plan our production and how we run the company operationally. So, we pay very close attention to what's happening in terms of end market demand. My confidence has increased since last quarter that indeed Q2 was the cyclical bottom. We've exited Q3 with very lean channel inventory. We've taken inventory off our own balance sheet though. We're positioned with a very healthy backlog of inventory on our own balance sheet so that the anticipated demand upsurge as we expect in 2025, we're very well equipped and ready to meet that. So foray in the fourth quarter, as we've said, we expect to see continued sequential growth. And indeed, we'll also see, I think, particularly in the industrial area, continued improvement in customer inventory levels. So, look, the whole recovery and the ramp of the recovery will depend on the macro situation. But nonetheless, given the design wins, we have a record design win pipeline in the company. So we're facing many secular tailwinds with a very strong pipeline, a very good supply line, and with a very lean inventory on the customer's balance sheet. So that gives me the optimism, Tore, that we're very well positioned coming into the new year.

Our next question comes from Joseph Moore with Morgan Stanley.

Yes, thank you. My question is on the trajectory of automotive versus industrial. It seems like automotive entered into an inventory correction a little bit later, and so far has been much less severe. I guess you sort of talked about some ongoing headwinds in that space. Can you just talk about what overall drawdown might you expect in automotive and where are we in customers kind of burning down safety stock inventory?

So, Joe, this is Rich, and I'll take a crack at that one. So, I'll just level set a little bit from our perspective. And what we're seeing in the market is that cars continue to become more electric and software-defined, which is also driving our semi-content growth, largely trying to address increased battery densities, more sensors, and displays. And we do expect that this will be a long-term tailwind for our business. However, and this is where we're starting to see some of the pullback. The vehicle market has softened in the near term. We're seeing our customers pull back on their production. And at this point, we're seeing them start to choose to burn off some inventory. So we are seeing that, right? The softness is evident in our results. Auto has been down year-over-year for two straight quarters, and we expect it will be down again in Q4. From a bookings perspective, we did see a decline in bookings in auto. In particular, we've seen inventory digestion in our legacy auto and in our BMS portfolios. We expect that's going to continue into at least the fourth quarter, particularly when you consider the challenging purchasing environment that currently exists for customers. However, to your question around the peak to trough unless our returns to pandemic levels, we don't see the peak to trough being nearly as dramatic as we saw in our other end markets. The underlying secular growth trends that I described are driving higher semi content. We continue to see more penetration and value capture across all vehicle types, whether it's ICE, plug-in hybrid of electric or full electric in the fastest growing applications. If you think about that, ADAS, digital cockpit and electrification. So we will be down, but we don't expect that the cycle depth to be as severe as we saw, for example, in industrial.

Great, thank you very much. And I guess as a follow-up, are you seeing that behavior any different regionally? Is the China automotive market different than the western markets in terms of where they are?

No, I'll say overall, it's pretty unanimous across all markets. I'd say China, all of us did okay. We talked about some design and branding there, so that's helping offset some of the softness. But it's an overall comment; auto is a bit weaker today than it was 90 days ago, whether it's North America, Europe or Asia.

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

Thanks for taking my question. Vince, glad to hear about your optimism about turning the cyclical corner. Do you think the environment allows for sequential growth to continue into Q1? Seems like industrial could grow, autos, I'm not sure, given some of the bookings commentary. And consumer tends to be down seasonally. So just conceptually, how should we model the shape of this recovery into Q1? Thank you.

Yes, well, at this point it's hard to call, given that the environment is still a little, let's say, a bit of disequilibrium, but I think generally speaking, we would probably expect to see a bit of a seasonal decline in the first quarter, and then a bounce back in the second. That's the sentiment, but overall I maintain my outlook that we will see a brisk growth year in 2025.

And then I'll help you out a little bit on the seasonality question. It's been a few years now since we've seen seasonal trends in our business. You're right. If you look back over the past 10, 15 years for ADI, consumer is down 10%-plus sequentially in 1Q, and the BV markets of industrial, auto, and comms are down low single digits. As Vince said, there's probably no belief today that we'd be any better than seasonal given where we are today, but we'll update you in 90 days of how we feel about Q1.

Yes. I think the big modulator for us will be what happens in industry in particular, and what I can tell you is that the various C-suite conversations I've had with our industrial customers would suggest that their optimism is also strong for 2025.

Our next question comes from Timothy Arcuri with UBS.

Thanks a lot. I just wanted to ask on that answer. So you were above seasonal in fiscal Q3 or above seasonal in fiscal Q4. Sounds like you're not willing to commit that you're going to be above seasonal in fiscal Q1. The street's modeling like 5% or 6% above seasonal for fiscal Q1. Was there something that happened in bookings? Did bookings like slow in the last couple of weeks or the last month or something to make you not want to commit to the fact that fiscal Q1 would be above seasonal or just that it's 90 days away and you just don't want to comment on it? Thanks.

I'll begin with the street expectations, and then Rich will discuss bookings. We haven't provided guidance for Q1. The street anticipates that Q1 will perform better than seasonal trends for calendar Q4 or fiscal Q1. I'm hopeful for a recovery. While there have been changes in the last 90 days, we remain optimistic about 2025 and the entire year. However, we can't confirm if it will be above seasonal in our outlook for a strong year in 2025. Now, I'll hand it over to Rich to explain some of the booking dynamics.

Yes, from a bookings perspective, up until Q2, as we talked about, we'd seen three straight quarters of broad-based bookings improvement. However, Q3 was different. We saw continued bookings growth for industrial, consumer, and communications, but we did see automotive orders decline, which resulted in a modest drop in our total bookings during the quarter. We still ended with a book-to-bill around parity. If I look at it from a geographic perspective, regionally bookings were the weakest in Europe. Americas were modestly weaker, which offset bookings growth in Asia.

Our next question comes from Toshiya Hari from Goldman Sachs.

Hey, good morning. Thanks for taking the question. It was good to see inventory on your balance sheet come down again, and you guys spoke to channel inventory coming down as well. As you look forward, what are your thoughts on utilization rates internally? How are you engaging with your foundry partners, and what's embedded in your October quarter outlook as it pertains to the channel? Thank you.

So, as I noted in the last call, we said both utilization and, in fact, gross margins had bottomed in Q2, and that is proving to be true. From an inventory in the channel perspective, the expectation is we will ship to end demand. We are currently at the very low end of our range in the channel at seven to eight weeks. As we've mentioned previously, if we saw continued improvements, we would start shipping to end demand. So we will do that in the fourth quarter.

Thank you.

Obviously, when it comes to the balance, we have a hybrid manufacturing system which enables us to keep utilization rates as high as possible internally, and when our factories run out of capacity, then we have lots of choices externally for silicon capacity. We've got a lot of inventory on the balance sheet, and our factories are well capable of improving utilization rates as demand continues to improve over the coming quarters.

As a quick follow-up, I think your internal utilization rates last quarter were in the mid-50s, if I'm not mistaken. Are you at or above 60% at this point, or if you can comment on that?

We need to consider our utilization as we adjust the rates. I would say that the last score was lower, but it's moving higher for Q3 and Q4, and we are well below the normal level, which is typically around 85% to 90% utilization.

Got it, thank you.

I'll provide some context. As utilization increases, it impacts gross margins. Over the past year, the decline in gross margins can be attributed to roughly half being related to utilization and the other half to changes in mix. So, as you listen, consider how this affects gross margin expansion.

Our next question comes from Stacy Rasgon with Bernstein Research.

Hi, guys. Thanks for taking my question. I was hoping you could give us a little more granularity on the segment guide for next quarter. And then you said industrial, and I think consumer up and auto down. Any more color, like is consumer usually up, is it up double digits, is industrial up mid-single, auto down by low single, like any further color you could give us on the segments would be helpful.

Sure, Stacy, I'll grab that one. Yes, so let's start with consumer. You're right, consumer's up about double digits, about 10% or so embedded in our outlook. Industrial's had another solid growth quarter, probably high single digits sequentially. We had cases about flattish plus minus, depending on how things go here, and although the weak market as we discussed, it will probably down low single digits sequentially.

Got it. That's helpful. If I could have a quick follow-up, just how are you thinking about OpEx growth in the next quarter? It was pretty well under control this quarter. Is there anything that drives that up? Like what do you think about the OpEx trends as we're going to the end of the year?

So Stacy, I'll take that one. So obviously, we exceeded the high end of our outlook in the third quarter, given the beat on gross margin and revenue as well as our continued cost management. Our Q4 guide obviously does imply a modest margin contraction sequentially despite our expectation for higher revenue and gross margin. The main driver of that is our increase for merit increases that will go into effect during the fourth quarter. So that will be a downward pressure as we head into the fourth quarter.

I mean, the big margin on our OpEx, Stacey, is obviously the bonus. That obviously with declining profit and revenue over the past several quarters dropped accordingly. Now, with an increase in revenue and improvement in profitability that will increase. But that's self-funding, so to speak.

Got it. How much do the OpEx go up then?

For our fourth quarter outlook, I’d say sequentially an increase in our OpEx around 5%.

Our next question comes from Christopher Danley with Citigroup.

Thanks guys. First, just a little clarification on inventory in the auto market. Vince, I said it, I think at the beginning you talked about inventory is very lean out there, but then you're also saying that there's inventory digestion going on in the automotive market. Can you just expand on that a little bit?

Dan, I'll grab that, and then Vince, talk about the overall customer inventory. Yes, I think every market spawned in different cases of inventory digestion. We feel good about industrial consumer comms have really normalized inventory levels. There are pockets on the auto side that are still digesting. Production levels have been cut over the past quarter, whether it's an ICE car or an EV car. That impacts inventory levels and desire to hold inventory on their balance sheets. From that standpoint, Chris, I don't know if Vince, if you have anything to add.

I think, Chris, overall, we've seen the worst is behind us, I think, in the industrial, consumer, and comms market. But automotive, I think, is a sector where we will see some inventory digestion issues into at least the early part of 2025.

Our next question comes from Harlan Sur with JPMorgan.

Good morning. Thanks for taking my question. So for fiscal ‘23, China domestic consumption, I think was about 18% of their total revenues, it was the worst performing geography. Last couple of quarters where bookings in China have been growing sequentially. Did that translate into sequential revenue growth out of the region in the July quarter? And then it looks like orders from the China region grew sequentially in July. How are they trending so far quarter-to-date? Are you still seeing positive signs out of this region?

Yes, we continue to see strong performance from a bookings perspective in China. We did see double-digit growth across industrial, auto and comms being slightly offset by a decrease in consumer. So China does continue to perform well. And our design win and our pipeline there are very strong.

Our next question comes from Joshua Butler with TD Cowen.

Hey, guys, thanks for taking my question. Maybe you can walk through some of the puts and takes into gross margin into the October quarter. Back of the envelope, I'm getting to roughly stable sequentially despite the revenue increase, and I imagine utilization is improving as well. How much of that is mixed? And in particular, is there any changes in the pricing environment as we get through this digestion into what I would imagine is a more competitive environment? Thank you.

Yes. I'd say it's significantly impacted by the favorable mix. Obviously, we get a benefit from the revenue upside. From a pricing perspective, and I've talked about this before, we continue to see pretty stable pricing, and I do expect that to continue. Obviously, it's different by geography and for big and small customers, but on balance, we are continuing to see stable pricing, and I expect we will see that going forward.

Once our products are installed in a particular customer's design, they tend to, in the industrial business, stay for decades, and pricing is very stable there. The competitiveness for new sockets or new wins, but nothing is new there. We as a company play in the high end of the game in terms of innovation, service, and support, and so that's the game we play. We will significantly higher ASPs than most. And those ASPs increase with each new generation of product. So, overall, as Rich said, the pricing environment is stable. I don't see that as a headwind on margin.

Thanks, Josh. I think that's all the time we have for questions today. I thought we had a little more time, but it's August. You guys can go out there and enjoy the weather a bit. So thanks for joining us all. We look forward to future calls with you guys, and have a great rest of summer.

Thank you.

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