Analog Devices, Inc.

Good morning, and welcome to the Analog Devices first quarter fiscal year 2019 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 Luccarelli, Director of Investor Relations. Sir, the floor is yours.

Thank you, Cheryl, and good morning, everybody. Thanks for joining our second quarter fiscal 2019 conference call. With me on the call today are ADI CEO, Vincent Roche, and ADI CFO, Prashant Mahendra Roja. For anyone who missed release, you can find it and relating financial schedules at investor.analog.com. Now on to the disclosures. The information we're about to discuss, including our objectives and outlook, include forward-looking statements. Actual results may differ materially from these forward-looking statements as a result of various factors, including those discussed in our earnings release and in our most recent 10Q. These forward-looking statements reflect our opinion as of date of this call. We undertake no obligation to update these forward-looking statements in light of new information or future events. Our comments today about ADI second quarter fiscal 2019 financial results and short-term outlook will also include non-GAAP financial measures, which excludes special items. When comparing our results to historical performance, special items are also excluded from the prior quarter and year-over-year results. Reconciliations of these non-GAAP measures to their most directly comparable GAAP measures and additional information about our non-GAAP measures are included in today's earnings release. Okay. With that, I'll turn it over to ADI's CEO, Vincent Roche. Vince?

Thanks very much, Mike, and a very good morning to everybody on the call. Before I get into my recap of the quarter, I wanted to briefly touch on recent developments. As you're no doubt aware, the U.S. government announced last week that it's restricting a large communications company from acquiring U.S. products and technology. While this will have at least a short-term impact on our communications business, our business is global, broad, and robust, and we'll manage through this. Prashant will give a bit more insight into the anticipated financial impact of this development during his particular section. So now onto our highlights. The second quarter of fiscal 19 was another successful quarter for ADI, with revenue from our B2B markets increasing year over year once again. This represents the 12th consecutive quarter of annual B2B revenue growth, which is really a testament to the diversity of our franchise and our ability to innovate ahead of secular growth opportunities. Revenue of 1.53 billion came in at the high end of our guidance, led by strong year-over-year growth from our communications applications across multiple segments. Adjusted growths and operating margins increased compared to last quarter to 70.6 and 41.5% respectively. All told, adjusted EPS was $1.36, which was also at the high end of outlook. Now, over the past 12 months, we've generated approximately $2.1 billion in free cash flow, or 34% of revenue. And during that time period, we've returned more than 100% of free cash flow to our shareholders after debt repayments. Now, before we move on to the financial section of our call, I'd like to continue our discussion around ADI's key markets, their trends, and ADI's strategic initiatives, positioning us to capitalize on these opportunities. We've previously discussed our strong position in the wireless market, particularly in massive MIMO and 5G, where our content opportunity is up to four times compared to traditional 4G systems. So today I'm going to talk about the other third of our comms business, namely the wireline market. The Warland market is very profitable. It's a steady growth business for ADI, with the combined company having grown at a high single digit rate annually for the past five years. The market and its challenges around precision, control, and power are a perfect match for ADI's comprehensive portfolio and domain expertise. There are many applications within the Warland business, but today I want to focus on the fastest growing segment, namely the optical market. The primary driver of the wireline market is unsurprisingly exponential growth in demand for digital data. IP traffic across carrier networks and data centers is doubling every two and a half years, driven primarily by cloud compute, backhaul of 4G and 5G networks, and consumption of data rich content. This extraordinary growth represents a significant challenge for the carrier networks and data centers that transport and manage this data. as it's not possible to lay new optical fiber or double data center floor space every two years. So their challenge is ADI's opportunity. The two primary ways to solve their data throughput problem are increasing the speed of the existing fiber network and reducing the form factor of data ports to increase data density. Carriers are increasing their speed of their networks by upgrading from 100 gigabits per second to 400 GPS. and in some cases to more than a terabit per second. At the same time, optical modules are being scaled down by two, four, and even 10x. At this level of data throughput, our customers are pushing the optical components and subsystems, such as lasers, modulators, and coherent signal processing to their physical limits. Precisely controlling throughput, managing synchronization, Compensating for signal impairments and reducing system noise is critical to overall system performance. By partnering closely with our customers, we're developing highly optimized optical control and power management products that match the smaller form factor required in next generation optical systems. Importantly, for every 4x increase in speed in an existing network, our control content opportunity increases by more than a third. This 400 gig control port space is the fastest growing segment of our optical business, largely driven by the rapid growth in data center port traffic. But a high precision signal chain only solves part of the problem in these next gen carrier and data center networks. Denser optical networks create power and thermal challenges that our customers must also mitigate to avoid harmful impact on the network's potential speed and data throughput not to mention impact on their operating expense as power and cooling represent over 30% of a data center's total cost of ownership. That is a huge opportunity for our power portfolio. We're taking our core power franchises, namely micro module and silent switcher technologies, for example, and leveraging ADI's market leading position to broaden our customer reach and develop optimized solutions for this market. In addition to optical port solutions, we also supply innovative power sequencing and hot swap products. These technologies enable our customers to mitigate costly downtime and avoid disruptions by managing the highly complex power chain of network and servers and routers. The addressable market for these solutions continues to grow as port and data traffic density continues to increase. Now, I've said in the past that for every dollar of signal chain we sell into a system, there's at least a dollar of power opportunity. And the wireline market is no different. Since our combination with LTC, we've seen our pipeline and power for the wireless market expand very significantly. So in closing, we expect continued profitable growth over the long term in the wireline market as control and power challenges intensify in response to the market's densification, with ever-increasing bandwidth demand. And as providers shift to silicon photonics, we expect even more opportunity for ADI, as control and power solutions are necessary to compensate for the lower inherent performance of these silicon-based photonics solutions. And with that, let me hand it over to Prashant.