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 second quarter fiscal 2020 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 onto the disclosures. The information we're about to discuss includes forward-looking statements that involve risks and uncertainties. Actual results may differ materially from these forward-looking statements as a result of various factors, including the uncertainty regarding the duration of COVID-19 pandemic and its impact on our business, our customers and suppliers, and the global economy, and also those discussed in earnings release in our most recent 10Q. These forward-looking statements reflect our opinion at 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 will also include non-GAAP financial measures, which exclude special items. In comparing our results to our historical 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 earnings release. And with that, I'll turn it over to ADI's CEO, Vincent Roche. Vince?

Thank you, Mike, and good morning to you all from Boston. I hope that you and your families are all staying safe and healthy during this period. First, we want to express our gratitude to the healthcare workers and the many other heroes on the front lines who are protecting the health and the well-being of our communities. Thank you all so very, very much. When we had our last earnings call in mid-February, we were just beginning to understand the depths of the COVID-19 impact in China. And since then, the pandemic has had a profound impact on the world, putting tremendous stress on society and, of course, the global economy. To counterbalance this, we've seen an unprecedented response from governments with the deployment of fiscal and monetary policies to soften the downturn and restart economic activity, whenever that may be. While our sector is not immune to the turbulent operating environment, it's my belief that technology will be what modifies the current weakness and drives new demand and business models post-pandemic. That's not to say that we're standing still. We've taken actions to curtail spending and reinforce our cash position. And we are learning from this challenging period and adapting quickly while still investing to ensure that we are well positioned in the recovery and for the long term. Our team has embraced the challenges with many of our employees working from home, but obviously not everyone can work remotely. And I want to acknowledge and thank our manufacturing employees who've continued to perform at exceptional levels and deliver for our customers. For these employees supporting our critical operations, we've implemented safeguards to protect them, including more PPE, increasing social distancing, and enhanced sanitization. and we've provided them with additional incentives and benefits to allow for continuity during this very difficult time. Our team has also done an excellent job staying close to our customers. We moved quickly to pivot manufacturing lines and prioritize our healthcare solutions that are needed in the fight against COVID-19. This has allowed us to expedite supply used in products such as ventilators, respirators, imaging systems, and patient monitors, to our healthcare customers. And I'm incredibly proud of the resourcefulness and commitment that we've shown in rising to this critical challenge. Additionally, through the ADI Foundation, we've made multi-million dollar donations to support both global and local pandemic response efforts. But our work goes beyond financial contributions. We're also partnering with hospitals and biotech startups to develop solutions such as rapid point-of-care diagnostic tests and clinical-grade patient monitoring that leverage our technologies. So now I'd like to discuss the current operating environment a bit. Given the reach and depth of the current crisis, global business activity has been disrupted, and today we have seen a deterioration in demand within our automotive, broad-based industrial, and consumer businesses. However, Our business is proving more resilient than during the global financial crisis. To that end, healthcare demand is at record levels and communications demand is robust across wireless and indeed wireline sectors. We're also seeing strength in portions of our industrial instrumentation business and steadiness in our defense business. Now this success is no accident. Through our organic investments and acquisitions of Hittite and LTC, ADI is a very different company than we were a decade ago with more diversity, a broader portfolio across high performance analog, power and RF, and higher exposure to more profitable and durable end markets. So now let me move to the other side of the equation and talk a little bit about supply. Across the world, supply chains were disrupted when many governments ordered shelter-in-place mandates and closed their borders. For ADI, capacity was reduced at our backend tests and assembly sites in mid-March across the Philippines, Malaysia, and Singapore. Once granted essential status, we acted quickly yet responsibly to ensure employee safety and improve our capacity. And today, I'm glad to say we're operating at normal capacity levels. This demonstrates the agility of our global operations and the dedication of ADI's employees around the world. Despite the fluid and uncertain demand and supply environment, we delivered revenue of 1.32 billion and EPS of $1.08. This was in line with the original range we provided on our first quarter earnings call. Underscoring the resiliency and flexibility of our business model, in any economic backdrop. Now, as we've mobilized Preserve ADI's strength in the near term, we're capitalizing on the many opportunities we see to fortify and expand our market position for the long term. Our team remains focused on our three strategic priorities, so let me provide you with a brief update on each. First is the efficient use of capital. Importantly, ADI has ample financial liquidity to meet the needs of our business, across critical investments, dividend payments, and servicing our debt. Despite the current macro environment, we've generated $1.8 billion of free cash flow, or 32% of sales, over the trailing 12 months. This continues to place ADI in the top 10% of the S&P 500. Throughout our 55-year history, we've encountered and navigated several Black Swan events successfully, by taking a disciplined and balanced approach to financial management. Specifically, the first call on our capital is funding new product development. This means investing smartly in both our people and technologies to ensure we continue to deliver disruptive innovation. In the quarter just passed, we invested 19% of revenue in R&D, spending 95% on the most attractive opportunities across our B2B markets. We also remain committed to strong shareholder returns with our dividend as the cornerstone. In the quarter, we returned over $340 million to shareholders through dividends and share repurchases. So let me turn to our second priority, which is about maximizing customer impact. We are continuously innovating to stay ahead of customer needs. And while COVID-19 has brought new challenges, it has also revealed new opportunities in a reordered world. During the quarter, our customer engagement didn't slow down. We hosted hundreds of virtual seminars with thousands of customers in attendance, training them on new solutions and new technologies. These interactions were very productive. We saw increased design activity on new product development across markets and customers. For example, We partnered with a key electric vehicle customer to reimagine how audio is rendered across their fleet. As a result of this increased and focused collaboration, we added our high performance audio digital signal processors to our A to B platform, more than doubling our content per vehicle. And in our instrumentation test business for data center compute, we continue to work with customers on reducing their system complexity and getting to market faster. Our innovative solutions combine our analog mix signal and power micro module portfolios. These solutions deliver four times the channel density while simultaneously increasing throughput. While these are just two examples, there are many more across all of our markets. It's this current flurry of design activity that positions ADI to accelerate post-pandemic. Our third priority is capitalizing on secular trends to expand our addressable markets and drive diversified growth. While every downturn has its own unique characteristics, they all seem to have one thing in common. That is, they drive tremendous change. Industries are prioritizing digitalization and connectivity more than ever, and new industries are emerging focused on the physical and cyber. ADI, where the data is born, is at the center of these exciting secular growth opportunities. And I wanted to share some thoughts with you today. As I noted earlier, our healthcare business is providing several of the technologies that are critical to the diagnosis and treatment of COVID-19. Taking a step back, ADI has been committed to this market for many years as we anticipated the opportunity for innovation to deliver better patient outcomes. Now, this crisis will challenge us to rethink and hopefully fast track the accessibility, affordability and wellness focus of global health care. To achieve this, health care systems are going to need to be upgraded and clinical grade patient monitoring will need to be extended from the hospital right down to the patient's home. Massive adoption of sensing, computing and cloud capabilities is going to be required. And we believe that ADI's technologies will be at the forefront of this transformation. The communications market is moving at a rapid pace to keep up with the strains put on bandwidth and latency as more people work remotely, transact business more digitally, and consume media from everywhere. Here, ADI is playing a critical role in building out the infrastructure required for an always connected world. Our integrated transceiver, power and optical control portfolios are enabling customers to economically scale their investments to build the next generation networks. We continue to innovate to meet future performance, size, and power needs, positioning us to gain share and to capture additional value. Another secular trend we're benefiting from is the rise of Industry 4.0. Now, when this trend isn't so new, the pandemic is moving it to the forefront of our customers' minds. It's clear that post-pandemic, supply chains will be reimagined and new ones will be built, ones that are more flexible, automated, and perhaps sovereign. To solve the economic burden that comes with this, customers will further automate their businesses with intelligent and connected factory floors and the increased use of robots, cobots, and analytics. This creates additional demand for precision signal chain and power franchises and extends ADI into new areas like software I.O., depth sensing, condition-based monitoring, and robust connectivity. Outside of these sector growth trends, I'm also personally inspired by the tremendous sustainability benefits that we've seen in a short amount of time. For example, We've seen sizable decreases in carbon dioxide, nitrous oxide, and carbon monoxide. I believe that ADI and the industry at large can and should be leveraging its creative brainpower to be better stewards of the planet. We recently published our comprehensive corporate responsibility report entitled Engineering Good. And I can assure you there'll be more to come as I'm deeply committed to ADI's leadership here. So in closing, the shape of the economic recovery is still very, very uncertain and dependent on many variables. While we're confident in our outlook provided today, this unprecedented macro backdrop will continue to influence supply and demand dynamics for some time to come. We're embracing these short-term challenges and by leveraging the collective power of our talent, our technology and customer engagements, I'm very confident we will emerge stronger. So with that, I'd like to turn it over to Prashant.