Analog Devices, Inc.

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

Thank you, Cheryl, and good morning, everybody. Thanks for joining our fourth quarter and fiscal 2019 conference call. With me on the call today are ADI CEO, Vincent Roche, and ADI CFO, Prashanth Mahendra Rajah. For anyone who missed the 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, includes forward-looking statements. Actual results may differ materially from these forward-looking statements as a result of various factors, including those discussed in earnings release and our most recent 10-Q. 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 ADH fourth quarter and fiscal 2019 financial results and short-term outlook will also include non-GAAP financial measures, which exclude special items. Comparing our results to our historical performance, special items are also excluded from prior periods. Reconciliation 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. As a reminder, 2018 was a 53-week year. and thus included an extra week of operations. In today's remarks, we have normalized our fiscal 2018 results to a 52-week year so that our comments on annual growth rates make for more accurate compares. And with that, I'll turn it over to ADI's CEO, Vincent Roche. Vince?

Thanks, Mike, and good morning to you all. Well, we delivered solid fourth quarter and full year results against what was a backdrop of challenging macroeconomic conditions and ongoing trade uncertainty. Importantly, we made progress positioning ADI for continued long-term success, which I will discuss in more detail shortly. In the fourth quarter, revenue was $1.44 billion, and adjusted earnings per share was $1.19. For the full year, revenue was approximately $6 billion, down slightly year over year, as double-digit growth in our communications market was offset by slower demand across other markets. Specifically, collective revenue from our B2B markets of industrial, communications, and automotive increased slightly compared to 2018, led by strong demand across the wireless communications sector. Given the current operating conditions, we continued to actively manage our business, reducing operating expenses. All told, full-year adjusted EPS was $5.15. We generated approximately $2 billion in free cash flow, While this year's 33% free cash flow margin is below our long-term operating model, we continue to be in the top 10% of companies in the S&P 500. ADI is a diverse business across customers, products, and applications that positions us to succeed in any macro environment. And in 2019, we added to our cutting-edge technology portfolio through strategic investments while partnering even closer with our customers. The resiliency of our business model in any economic environment is evidenced by our B2B revenue outperforming the industry in both fiscal 2018 and fiscal 2019. And we're not standing still. To that end, let's turn to our priorities for 2020. Priority one is deepening customer centricity. We possess the broadest product portfolio, applications expertise, and manufacturing capabilities. in high-performance signal processing. This enables us to solve our customers' toughest challenges at the intersection of the physical and digital worlds. The factors driving customer demand are, first, our customers are facing a scarcity of available analog design engineering talent, and thus, they are increasingly turning to us for that expertise. Second, The challenges our customers face in the third wave of information and communications technology are becoming ever more complex. In this world, digital systems increasingly rely on real world information to make mission critical decisions. And the accuracy and the integrity of this information is becoming more important. As a result, our customers are partnering with us more deeply to get the full benefit of our technology capabilities and product inventions and innovations. We are uniquely positioned to provide the enabling solutions with our comprehensive portfolio of high performance mixed signal, RF and microwave, and power management technologies. To that end, as we enter 2020, our opportunity pipeline value is at record levels and increased more than 15% year over year. Priority two is the efficient use of capital. First, R&D is critical to our company's success, and in 2019, we invested $1.1 billion there. To continue this virtuous cycle of innovation-driven success, we choose our investments wisely and, when necessary, pivot quickly, targeting the most attractive opportunities, particularly across our B2B markets. This long-term approach to R&D allows us to continue to innovate and fortifies our position against any economic backdrop. Second, we're extracting value from our acquisitions to complement our R&D and drive long-term value creation. With the Hittite acquisition, we became the market leader in high-performance RF with a portfolio that spans DC to 100 GHz. Since the acquisition five years ago, we've more than doubled Hittite's revenue. And in the last year, our RF franchise revenue increased over 30%, led by industrial and wireless communications growth. The LTC acquisition added high-performance power management and precision signal processing to our portfolio, positioning us to provide more fully integrated solutions and capture additional value. Due to the combination with LTC, we're building our power pipeline, which is up nearly 40% over the past year and beginning to deliver new revenue streams. For example, in power, we've won designs across 5G infrastructure, data center and automotive that are moving to low volume production in 2020, ahead of a more meaningful ramp in 2021. This puts us on a path to double the LTC historical revenue growth rates in the years ahead. In addition, we're making steady progress on the next phase of our LTC cost synergies, which Prashanth will elaborate on in just a while. Third, we're committed to delivering strong shareholder returns. Our target is to return 100% of our free cash flow after debt repayments to shareholders in the form of dividends and buybacks. And in 2019, we returned more than 120% of our free cash flow to shareholders after debt repayments. Priority three is capitalizing on secular trends to expand our addressable markets and drive diversified growth. And some examples include, for example, in 5G wireless. We're pushing the innovation curve on our market-leading integrated transceiver by adding digital capabilities, algorithms, and optimized power solutions. This enables customers to scale channel count by eight times while managing size and thermals. And 5G isn't just about wireless. It will also require a complete re-architecting of the core and wireline network to meet the 5G vision of gigabit speeds, low latency, and high reliability demanded by mission critical applications. This network expansion will require a significant upgrade of the backhaul system, opening a new revenue opportunity for ADI's optical and point-to-point microwave solutions. For electric vehicles, we have the highest performance BMS solution, providing customers with up to 20% more miles per charge than our competition. Next in our roadmap is revolutionizing how monitoring and controlling batteries will be solved, and that is wirelessly. This creates a more accurate, reliable, and necessary approach to measurement for the entire battery life, from formation to implementation to reuse. With the rise of Industry 4.0, factory floors are becoming more digital, with greater sensing, measuring, and actuating activities. In turn, this creates additional demand for our precision signal chain franchise, as well as extensions to this franchise into new areas. For example, our innovative software IO solution enables greater flexibility across the factory floor and high performance power is essential to managing heat dissipation as information density increases at the equipment level. However, it's not just about our core technologies. Digital factories are also creating new TAM for our suite of connectivity and sensor solutions. And last but not least, in healthcare, To build upon our strong growth trajectory, we're extending our high-end component franchise with integrated modules, increasing our BOM. We're also extending our signal processing hardware and algorithms into new areas such as glucose meters, surgical instruments, and digital health applications that predict and manage chronic disease. So in closing, at the start of this year, I shared the adage with you that a rising tide lifts all boats and that the true test of a company's strategy and business model is its performance during the low tide. Despite the external turmoil, for the full year we posted approximately 70% gross margins, best in class across the semiconductor industry, and almost 41% operating margins in line with our long-term operating model. As we look ahead, we're hopeful that market demand will improve as early as our second quarter. And in an ever-changing world, we remain focused on being agile and responsive to market dynamics, demonstrating courage in creating and seizing opportunities, showing additional prudence in our investments, while driving continuous improvement across every facet of our business. Longer term, the data era is creating an inflection across our industry. I believe that ADI's prospects are extremely compelling as our product portfolio is aligned with favorable secular trends that I believe will provide tailwinds for many years to come. And so with that, I'll turn over to Prashant.