Analog Devices, Inc.

Good morning and welcome to the Analog Devices Third Quarter Fiscal Year 2024 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, Vice President of Investor Relations and FP&A. Sir, the floor is yours.

Thank you, Kevin, and good morning, everybody. Thanks for joining our Third Quarter Fiscal Year 2024 Conference Call. With me on the call today are ADICO Chair Vincent Roche and ADICFO Rich Puccio. For anyone who missed the release, you'll find it in the latest schedules at investor.analog.com. On to the disclosures. The information we're about to discuss includes forward-looking statements, which are subject to certain risk uncertainties, as further described in our earnings release and our PRF reports and other materials filed with the SEC. After the results of the different material from the forward-looking information, these statements reflect our expectations only as data is called. We undertake no obligation to update these statements except as required by law. References to gross margin, operating, non-operating expenses, operating margin, tax rates, EPS, and pre-cash flow in our comments today will be on a non-GAAP basis. These include special items. When comparing our results or historical performance, special items are also excluded from prior periods. Reconciliations of these non-GAAP measures to 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 CEO and Chair, Vincent Roche.

Vincent Roche Thanks very much, Mike, and a very good morning to you all. But stronger demand for high performance product portfolio and skillful execution resulted in third quarter revenue of more than 2.3 billion, operating margin north of 41%, and EPS of $1.58, all above the midpoint of our outlook. These favorable results, combined with improved customer inventory levels and order momentum across most of our markets, increase my confidence that our second quarter marked the cyclical bottom for ADI. My optimism remains guarded, however, as challenging economic and geopolitical conditions are limiting a sharper recovery. We continue to balance near-term fiscal discipline with strategic investment in our long-term growth initiatives, positioning ADI to capitalize on the extraordinary opportunities that we see ahead. Now I'd like to draw attention to our industrial end market, which is our largest, most diverse and most profitable business, generating durable revenue streams that last close to two decades on average. As our business begins to recover from the pandemic's volatility, we're excited about the tremendous long-term growth opportunities of the industrial market. We offer our customers an unparalleled suite of high-performance solutions stretching from antenna to bits, sensor to cloud, and nanowatts to kilowatts. Our extensive technology portfolio, combined with our deep domain expertise and engineering muscle, has enabled us to secure leading positions across the most attractive industrial sectors. With growing digital software and algorithmic capabilities augmenting our cutting-edge analog portfolio, ADI is strongly positioned to solve our customers' most difficult challenges in factory and process automation, energy efficiency, secure connectivity, and many, many more. To illustrate the power and potential of our industrial franchise, let me share with you a few examples of how our recent innovations are unlocking new revenue streams and positioning us for strong growth in the years ahead. For example, our instrumentation and test business, which includes scientific instruments, electronic test and measurement, and automated test equipment is essential to the important scientific and technological advancements of the digital era. Within automated test equipment, for example, our next generation solutions increase channel density and throughput. while reducing energy consumption by up to 30% per system. These are crucial parameters for testing complex, high-performance compute GPUs and high-bandwidth memory systems for AI. As the AI infrastructure buildup remains a priority for global hyperscalers, we expect growth to continue into 2025 and indeed well beyond. Turning now to aerospace and defense, which has been our most resilient business during this downturn, ADI's domain expertise and high-performance portfolio across Aurifon microwaves, high-speed and precision converters, PAR and MEMS, uniquely positions us to deliver complete edge solutions, offering our customers scale, velocity, and lower total cost of ownership. As an example, we're building upon our programmable Apollo signal chain platform today to create full software-defined RF communications and sensor systems, which have the potential to increase our SAN by five times in commercial, defense, and aerospace communication systems. Indeed, we see a path to double-digit revenue growth in this sector in 2025, fueled by several high-value design wins that are going to production. In automation, though we've seen a slow recovery to date, we remain strongly confident in its future growth potential, as the benefits of increased productivity are ever more clear. Customers are prioritizing enhanced digitalization and IT-OT integration on their factory floors. Their deployments of inline instrumentation and advanced robotics are driving the need for more sensing, edge processing, secure connectivity, and car management. Within robotics, we're seeing a progression from fixed-arm machines to autonomous and mobile robots to eventually humanoid robots. This evolution creates additional opportunities for a precision signal chain franchise and sensing connectivity and motion control subsystems with fully isolated and efficient power solutions can drive content from hundreds of dollars in robots today to thousands in autonomous and humanoid robots. What is additionally exciting about these advances is their broad applicability beyond factories, such as surgical robots and imaging systems in healthcare. ADI's products have the potential to dramatically improve a surgeon's effectiveness through a more precise surgical experience with lower latency connectivity Additionally, patients gain the potential benefits of shorter hospital stays and fewer complications. The evolution in robotics is expected to unlock billions of dollars of potential opportunity for high performance analog, mixed signal, power connectivity, and sensing solutions. We see the potential for a doubling of our robotics revenue in the years ahead. Turning now to energy transmission and distribution, our customers are modernizing and digitalizing the electrical grid to respond to exponentially accelerating energy demand, driven in part by the proliferation of electric transportation and rapid AI adoption. This process is resulting in a grid that is distributed, dynamic, and bidirectional, a paradigm shift from the past model of linear stable supply. We're working with traditional suppliers and disruptors to enable the necessary intelligence for the new grid from decentralized power plants to the distribution edge. We're leveraging our analog and algorithm capabilities in cutting edge energy monitoring and management solutions. Additionally, our battery management technology increases capacity and improves energy utilization in the grid's renewable energy storage systems. This reimagined intelligent grid of the future has the potential to expand our sun by over $10 billion and creates tailwinds for our energy franchise for many years to come. Given the synergies across our industrial portfolio, our pace of innovation, and the emergent signs of market recovery We're optimistic for our industrial business that has turned the corner and 25 will be a robust growth year. So in closing, our investments in high performance analog solutions are enabling us to intersect with and leverage the numerous concurrent secular trends that transcend the business cycle and will propel us into the future. Our commitment to our customer success And to impactful innovation will be the path that carries us there, ultimately increasing long-term shareholder value.