Release Date: May 22, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Analog Devices Inc (ADI, Financial) reported Q2 revenue of $2.16 billion, exceeding the midpoint of their outlook.
- The company believes it has passed the low point of the cycle, with improving global manufacturing PMIs and stabilizing customer inventories.
- ADI has secured significant wins in the healthcare sector, particularly in surgical robotics and continuous glucose monitoring.
- The company is seeing strong performance in the automotive sector, driven by higher content vehicles and increased design wins.
- ADI is leveraging AI to enhance product offerings and internal operations, positioning itself for future growth in AI-related markets.
Negative Points
- Q2 revenue was down 34% year-over-year, indicating a significant decline compared to the previous year.
- Industrial revenue, which represents 47% of total revenue, was down 44% year-over-year due to inventory digestion.
- Automotive revenue, representing 30% of total revenue, was down 10% year-over-year, with broad-based declines offsetting growth in specific areas.
- Communications revenue, representing 11% of total revenue, was down 45% year-over-year due to weaker demand and inventory digestion.
- Consumer revenue, also representing 11% of total revenue, was down 9% year-over-year, with declines across most applications.
Q & A Highlights
Q: 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 demand, inventory replenishment, and if there's any subsegments within industrial that's driving that outperforming growth.
A: Sure, Tore. This is Rich, and I'll take that one. So industrial, obviously, is our most diversified and profitable end market, and it's weathered an unprecedented broad-based inventory correction over the past year. Importantly, we expect Q2 was the bottom for industrial and it will grow in the second half starting here in 3Q. Stronger PMIs are supporting the broad-based bookings we've seen for the 3 consecutive quarters now. And as mentioned in the prepared remarks, we're planning to reduce channel inventory further in Q3, which impacts industrial more than any other market. This will be more than a year of undershipping consumption, one reason we believe inventory headwinds have stabilized for industrial. Given these dynamics and the exciting design wins and AI-related tailwinds in our instrumentation and test business, which Vince alluded to, we feel strongly we are at the beginning of the industrial recovery.
Q: I wanted to ask about the book-to-bill. So it's above 1, is it above 1 in all the segments? Or is it just above 1 in industrial?
A: Yes. It's actually so -- good question. It's above 1 in all end markets. Not all applications within end markets are above 1, though. And if you think about the shape of that bookings throughout the quarter, they -- we talked about last earnings call, bookings improved. And they started below parity and exit the quarter above parity, and that's across all markets and geographies. But again, I'll reiterate, it's not all applications. And we talked a little bit about, in the last question, about what applications are above 1. You can think of some instrumentation, some automation, some aerospace and defense within industrial. So broad-based improvement in bookings across all market and geographies is really the main takeaway.
Q: 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. So I'm curious if you expect this upturn to be similar to past cycles and we kind of follow those patterns? Or do you see anything in the marketplace today or anything from customers that would indicate something materially different in terms of the shape of the upturn?
A: Yes. Thanks, Toshiya. So yes, look, first off, we believe we've seen the bottom of the cycle. And as Mike indicated, the stronger PMIs that we've seen, particularly in the industrial sector, give us a lot of confidence and there's a strong correlation between our industrial business, which is about half of the company's total revenue. So -- and as we've said now a few times, bookings and backlog coverage out for the next several months beyond this quarter would give us strong indications that we expect continued growth during the second half of the year. I'll also point out, I think, for 2025, we will have a brisk growth year, that's my sense. And we're asked all the time, what's the shape going to be? Well, I don't really know what the exact shape is going to be, but I think we're on the upward trajectory. We have confidence in that across the board.
Q: What is the right way to understand the true change in end demand if we set aside all the inventory fluctuations. So for example, is it worthwhile seeing what did distribution sell-through do year-on-year in Q2, what is the assumption for Q3? And does that inform us in any way about can Q4 be seasonal, whatever is a version of seasonality? I'm just trying to see right -- the right apples-to-apples way of looking at what is end demand doing setting aside all this inventory noise.
A: Yes. Yes. Look, I think it's very hard to answer to that question simply because when history is written, we're going to get the average of what's happened, pre-pandemic and post-pandemic. So there's been so much ringing in the system, demand overshoots and then demand undershoots. But my sense is, certainly from our perspective, I think we're very well positioned to be able to capture the upside if things grow faster than we expect. We've got a lot of inventory on the balance sheet. We've kept inventory closer to ADI, less downstream. And with the -- we've got as well a tailwind here from AI, which I think is going to be a multiyear tailwind, so we've got that pushing us along. But at the same time, we've got -- still, we've got high interest rates. We've got, still, relatively high inflation in many places. So I think, ultimately, the size of the recovery and the pace of the recovery will have a strong economic and geopolitical tone to it. But I mean, overall, my sense is we'll see good growth for the remainder of this year and strong growth in '25, and 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 in each of our segments. And I feel good about the place that semis are in as an industry right now as well in terms of overall demand as the edge becomes more intelligent and the cloud builds out. So -- 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're in a recovery phase.
Q: Can you talk about the gross margin drivers from here? Maybe touch on utilization rates and inventory trends and -- some of your competitors have talked about pricing returning to historical norms. If that happens, can you still get the gross margins back to the previous peak?
A: Sure, I'll take that one. From a gross margin and utilization perspective, we talked a little bit about this in the Q1 call, we expect both utilization and gross margin bottoming in Q2. However, we do expect the pace of gross margin expansion in the second half to be modest. And specifically for Q3, we anticipate gross margin a bit above 67%. Looking from here, gross margin expansion is going to be dictated by continued revenue growth, mix of business and utilization. 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 about a lesser amount than in Q2.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
