Analog Devices, Inc.

Good morning, and welcome to the Analog Devices Third Quarter Fiscal Year 2020 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, Senior Director of Investor Relations. Sir, the floor is yours.

Thank you, Cheryl, and good morning, everybody. Thanks for joining our Third Quarter Fiscal Year 2020 Conference Call. With me on the call today are ADI CEO, Vincent Roche, and ADI CFO, Prashant Mohenjo-Rajab. For anyone who missed the release, you can find it and relating financial schedules at investor.analog.com. On to the disclosures. The information we're about to discuss includes forward-looking statements, including statements relating to our objectives, outlook, and the proposed maximum transaction. These forward-looking statements are subject to certain risks and uncertainties as further described in our earnings release. our most recent 10Q, and other periodic reports and materials followed with the SEC. Action results could differ materially from the forward-looking information, as these statements reflect our expectations only at the date of this call, and we undertake no obligation to update these statements except as required by law. Our comments today will also include non-GAAP financial measures, which exclude special items. Comparing our results to historical performance, special items are also excluded from 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 ADI's CEO, Vincent Roche. Vince?

Thanks very much, Mike, and good morning to you all. I hope that you and your families are healthy and safe at this time. So I'll start my remarks today on our quarterly results and the current operating environment before providing you with an update on our priorities. This includes additional insight, of course, into our recently announced acquisition of Maxim Integrated. ADI executed exceptionally well in the third quarter, despite the highly uncertain environment. Demand was resilient, surpassing our expectations, leading to stronger than expected results. We saw continued strength in communications across both wireless and wireline applications, Healthcare saw record demand and other parts of our industrial portfolio, such as instrumentation tests, also performed well. Unsurprisingly, the main area of weakness was automotive, driven by global factory shutdowns and lower vehicle sales. Turning to supply, we're operating at normal capacity, which helped us clear backlog and bring supply and demand into a better balance. Our team delivered third quarter results above the midpoint of our revised guide with revenue at 1.46 billion and EPS at $1.36. B2B revenue was flat year over year and increased 11% sequentially, and both growth and operating margins returned within the range of our financial model at 70% and 42% respectively. We also generated $1.8 billion of free cash flow or 33% of revenue over the trailing 12 months. This continues to place ADI in the top 10% of the S&P 500. These results further underscore the strength and flexibility of our business model against any economic backdrop. And I'm proud of how the ADI team continues to deliver for our customers. Now I'll turn to an update on our strategic priorities. We're focused on spending our capital efficiently. The first call is funding new product development. During the quarter, we invested approximately $260 million in R&D with more than 95% targeted at the most attractive B2B opportunities. This continued reinvestment in our business is leading to excellent customer engagement. And let me provide you now with a couple of examples. In our communications business, we announced the collaboration with Intel to create a flexible radio platform that will enable customers to scale their 5G networks more quickly and more economically. The high-performance O-RAN compliant solution leverages our market-leading software-defined transceiver technologies. This positions ADI to expand our market leadership. In automotive, our new road noise cancelling solution is gaining traction. Since announcing our initial win with Hyundai in February, we've added five more customers, including the North American leader in electric vehicles. This innovative solution reduces the car weight by almost 100 pounds and energy requirements by about 3%, while potentially doubling our content opportunity per vehicle. We're seeing great design momentum across our diversified industrial market also. For example, in factory automation, Customers are rethinking supply chains to make them more flexible with faster response times. And to quicken the pace of adoption, we have formed an alliance of partners to develop an open source architecture. I'm excited to announce a Fortune 500 healthcare customer is teaming with ADI to help upgrade its manufacturing capabilities using more connected robotics, thereby doubling our addressable market. And in space, We have design winds going to production this year with traditional aerospace companies and new emerging disruptors that enable the proliferation of next-generation communication satellites. These satellites continuously change their position to Earth and require space-grade phased array and beamforming technology to create an uninterrupted connection. And we're using this strong position in RF to attach power technologies thereby increasing our addressable market by a third. ADI also remains committed to strong shareholder returns. This quarter, we returned approximately $230 million through dividends. Recall that we paused share buybacks due to the pandemic. This has helped us further solidify our balance sheet with a cash balance of more than a billion dollars. At this point, I'd be remiss to not discuss our M&A strategy. in the light of the Maxim acquisition. ADI selectively uses M&A to expand both our scale and our scope in order to better address the future needs of our customers and deliver sustainable, profitable growth. And while cost synergies are an important element in evaluating any acquisition, from our perspective, the most compelling benefits come from combining technology portfolios to capture new addressable markets and drive on-term revenue synergies. This revenue takes time to realize, given the nature of the analog business, that our products deliver recurring revenue streams and cash flow for decades. Therefore, we strive to achieve our return objective within approximately five years. This timeframe allows us to not only achieve the stated cost savings, but also begin to capture the early revenue synergies. And I think the acquisition of LTC illustrates the benefits of our strategy. Our top priorities there were harmonizing the two organizations to create an entity that is better than the sum of its parts. To that end, I'm proud to say that we've retained and invested in LTC's exceptional engineering talent. Together, we've created an exciting roadmap of high-performance analog and power solutions combined. We're exceeding our original $150 million cost synergy target. And we're on track to realize the next $100 million exiting fiscal 21. And from a revenue perspective, we've more than doubled our pipeline value. And we have over $500 million of lifetime revenue coming to market this year, increasing our confidence in doubling LTC's historical growth rate. With LTC complete, we pursued the acquisition of Maxon to strengthen our leadership in the analog industry. that are positioning ADI to capitalize on secular growth trends. Over the last five years, Maxim has shifted its business strategy to focus on B2B markets while enhancing profitability. As a result, Maxim has increased its B2B revenue mix to approximately 80% of total from 55%, expanded its gross margins by more than 500 basis points, and increased its free cash flow margin by over 600 basis points during this period. Combined, we're confident we will continue to improve Maxim's performance. This will be driven by our cadre of engineering talent, complementary technologies, and breadth of market applications that I'd like to expand on a little here. The cultures of ADI and Maxim are very aligned. Both companies share a commitment to innovation and engineering excellence. With a combined team of more than 10,000 engineers and $1.5 billion of annual R&D investment, we will continue to be the destination for the world's best analog talent. And with three times the field technical resources, we'll be better positioned to uncover cross-selling opportunities and serve existing and new customers who have an increased need for application and design support. In the area of power management, Maxim's application-focused offerings are highly complementary with ADI's more general purpose or catalog power portfolio. Together, we will have a more comprehensive power portfolio with approximately $2 billion of revenue. This is particularly important as power is the largest and fastest growing analog subsegment. And with increasing design complexity and the need for better efficiency, the system power challenges that our customers must overcome continue to rise and rise. In automotive, Accent is one of the premier franchises increasing revenue at a mid-teens rate over the last five years. They're a leader in high-speed data connectivity for cameras, radars, and processors with serial link technology, while ADI is a leader in audio solutions with our A2B platform. And both companies are well positioned in vehicle electrification, enabling us to better address automakers' EV requirements, which continuously evolve. Together, we will capture more of the increasing system content per vehicle and enable a better experience for the consumer. Taking a step back, the combined company will have unique positioning with 85% exposure to highly profitable long-life B2B markets. Maxim's strengths in the automotive and data center markets will complement ADI's strengths across the industrial, communications, and digital healthcare markets. Additionally, the combined company will have increased financial strength. We expect the combination to be accretive to adjusted EPS within 18 months post-close, with targeted cost synergies of $275 million by the end of the second year. We also expect to maintain an industry-leading financial profile. As always, we're committed to generating robust free cash flow, and our goal is to reach the high end of our margin range of 40%. With our lower leverage ratio at close, we'll also have the opportunity to deliver enhanced cash returns to our shareholders. And I believe that together we can grow revenue at mid-single digits due to our alignment with important secular growth trends, such as Industry 4.0, digital healthcare, next generation communication systems, and vehicle electrification as examples. So, in closing, we're seeing promising evidence that a broad-based recovery is underway. However, we recognize that the recovery is highly dependent on the future impacts of the pandemic. We've used this unprecedented time to better align our organization and investments into the most important areas. We believe we'll emerge stronger and are better positioned to drive profitable growth. And as I've shared today, we're very excited about the combination with Maxim, which will drive the next wave of disruptive innovation and deliver significant benefits for all stakeholders. And with that, I'll turn it over to Prashant to go through the financial details and outlook.