Analog Devices, Inc.

Good morning, and welcome to the Analog Devices first quarter fiscal year 2020 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, Senior Director of Investor Relations. Sir, the floor is yours.

Thank you, Cheryl, and good morning, everybody. Thanks for joining our first quarter fiscal 2020 conference call. Moving on the call today are ADI CEO, Vincent Roche, and ADI CFO, Prashant 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, include forward-looking statements. Asked results may differ materially from these forward-looking statements as a result of various factors, including those discussed in earnings release and in our most recent 10Q. These forward-looking statements reflect our opinion as to the 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's first quarter fiscal 2020 financial results and short-term outlook will also include non-GAAP financial measures, which exclude special items. In comparing results to historical performance, special items are also excluded from their prior periods. 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. And with that, I'll turn it over to ADICO, Vincent Roche. Vince?

Thanks, Mike, and good morning to everybody. Well, our first quarter results were in line with our expectations, as you'll have seen. Importantly, we managed our operating costs and working capital effectively to position ourselves to deliver margin expansion in the quarters ahead. Before I discuss the quarterly highlights, I'd like to address the coronavirus outbreak. First and foremost, Our top priority is the health and safety of those affected, and of course our employees. We're doing everything we can to provide our customers with the support they need to minimize disruption to their businesses. And while the situation remains fluid, we are monitoring it closely. Prashant will expand on the financial implications in just a while. So now into the first quarter. Revenue was $1.3 billion, down versus the prior year, but in line with our expectations. Operating margin was approximately 37%, a decline versus last year due to lower revenue and our decision to lower utilization. Adjusted earnings per share was $1.03, above the midpoint of guidance. Over the trailing 12 months, we generated approximately $2 billion of free cash flow, equating to a 35% free cash flow margin. And this continues to place us in the top 10% of the S&P 500. On our call last quarter, we shared our priorities for 2020, and I'd like to give you an update on our progress so far. Priority one is the efficient use of our capital. The first call in our capital is funding new product development activities. In the first quarter, we invested over $250 million in R&D, with more than 90% of this spend targeting the most attractive opportunities across our B2B markets. For example, an area of increased focus for ADI is our power franchise. Here we've been increasing R&D to enhance our strong position in the broad market and to extend into new opportunities across areas like data center, automotive, and 5G infrastructure. Our power design win momentum remains strong, and we expect to double the LPC historical revenue growth rate in the years ahead of us. At the same time, we remain committed to delivering strong shareholder returns. In the first quarter, we returned over $300 million to shareholders, and we just announced a 15% increase to our quarterly dividend. Priority two is deepening customer centricity. As I've shared before, the combination of our broad product portfolio, domain expertise, and manufacturing capabilities sets ADI apart. We're always anticipating the technology needs of our customers and engaging with them early in order to solve their toughest challenges. And I'd like to share just a few examples specific to our automotive segment with you now. Our A2B platform continues to gain traction in the cabin electronics ecosystem. By leveraging our platform portfolio, we're opening up new applications for our customers, such as active noise cancellations. In the quarter, Hyundai became the 14th auto manufacturer to incorporate A-to-B technology. And together we announced the industry's first all-digital road noise cancellation system. With the rise of active noise cancellation, we're creating stickier customer relationships due to the integration of our hardware and software capabilities while increasing our SAN for vehicles. There's also a lot of intensity and urgency in OEMs moving towards electric power trains. We were an early player in the market, partnering with industry leaders to improve the efficiency of the battery in electric vehicles. As a result, our BMS solutions are delivering greater miles per charge and monitoring battery health more accurately. In the U.S. electric vehicle market, we're benefiting from near-term strength as customers ramp production. And new design wins across future models will help us to deliver on our long-term objective of growing BMS revenue at a double-digit rate. Priority 3 is capitalizing on secular trends to expand our addressable markets and drive diversified growth. We've previously discussed with you key secular trends across our company, such as 5G, electric vehicles, factory automation, and data center. Now today I'd like to spend some time on the space market, perhaps a more obscure sub-segment of our industrial sector. Our space customers' challenges are not just around RF signal processing and power management. Space solutions must also perform under extreme cosmic radiation and conditions of high temperatures. We solve these challenges through the combination of our comprehensive product portfolio and the passive knowledge base built over many decades of serving this market. While space represents a couple percent of ABI's total revenue today, it commands stellar margins, and we see potential to double the business over the next five years. Now let me share a little more with you about why this sector is exciting to us. The space market is rapidly evolving. Over the last decade, unprecedented levels of capital have gravitated towards this vertical. thereby increasing the number of privately funded space companies by 20 times. Therefore, new technologies and capabilities are emerging that are leading to new opportunities for ADI. This includes the advent of low earth or communication satellites. These satellites are becoming the new frontier in space, with forecasts suggesting that by 2020, over 20,000 will be in orbit, up from just hundreds today. To provide some context, the satellites differ from today's geostationary or geosatellites. Technologically, they provide lower latency and higher bandwidth, which enable real-time communication. Operationally, they continuously change their position relative to the Earth and only stay connected with a given terminal for approximately 10 minutes. As a result, the number of terrestrial terminals that communicate with these satellites whether they're on the ground or in the air, will grow into the millions with the proliferation of NEO satellites. To succeed in creating this network, both satellites and terminals must be capable of beam steering. And this requires an exponential increase in channel count enabled through phased array antennas, an architecture that is used in 5G networks already today. And as you can imagine, more channels packed into smaller form factors is increasing thermal and power hurdles. To help solve the engineering challenges of creating this ubiquitous and always connected Leo network, our customers are increasingly turning to ADI, looking to us to not only be a supplier, but indeed a key system architect. So we're engaging with customers early in their design process to develop end-to-end solutions from antenna to bits combined with power capabilities to deliver the required performance and, of course, robustness. Our ability to provide a comprehensive portfolio of space-grade solutions across the entire analog spectrum from RF and signal chain to power is unique. And this cannot be completely replicated by any of our competitors. making ADI the go-to supplier for traditional OEMs as well as the next wave of disruptors. All told, we see the LEO communication satellite stand becoming at least four times the size of GEO over the next five years. And with LEO's refresh cycle compared to today's satellites, we expect our space business to deliver a steadier stream of revenue in the years ahead. In summary, space has the potential to be a meaningful growth driver and unlock value across other verticals as well. Once fully operational, these LEO networks will provide real-time, reliable high-speed connections globally, ushering in opportunities from autonomous driving to telesurgery. So in closing, and speaking broadly about ADI, I believe demand for our solutions will be unprecedented as technological innovations underpinned by a bit of ascending hyperscale and edge computing, and pervasive connectivity continues to grow rapidly. And as I look ahead, I believe we're very well positioned to deliver sustainable, profitable growth and, indeed, strong shareholder returns. So with that, I'll hand it over to Prashant.