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.

And so with that, I'm going to turn it over to Rich, who will take you through the numbers. Thank you, Vince.

Let me add my welcome to our third quarter earnings call. Third quarter revenue of $2.31 billion came in above the midpoint of our outlook, finishing up 7% sequentially and down 25% year over year. Industrial represented 46% of revenue in the third quarter, finishing up 6% sequentially and down 37% year over year. Every major application increased sequentially except for automation, which declined at a much slower pace than it had in previous quarters. Automotive represented 29% of revenue, finishing flat sequentially and down 8% year over year. We saw continued double-digit growth year over year for our industry-leading connectivity, and functionally safe power platforms. Conversely, automotive production cuts are extending inventory digestion across customers, particularly impacting our legacy automotive and electrification businesses. Communications represented 12% of revenue, finishing up 10% sequentially and down 26% year over year. Slowing customer inventory digestion enabled both wireless and wireline growth sequentially. And lastly, consumer represented 14% of revenue, finishing up 29% sequentially and increased year over year for the first time since 2022. We saw diversified growth across applications with notable strength in portables and gaming. Now let's move from the top line to the rest of the P&L. Third quarter gross margin was 67.9%, up 120 basis points sequentially, driven by higher revenue, higher utilization, and favorable mix. Operating expenses in the quarter were 619 million, up modestly sequentially, driven primarily by higher variable compensation. Operating margin of 41.2% exceeded the high end of our outlook. Non-operating expenses finished at 70 million, and the tax rate for the quarter was 10.8%. The net result was EPS of $1.58, which finished near the high end of our outlook. Our financial position is solid, and I'd like to call out a few items from our balance sheet and cash flow statement. We ended Q3 with more than $2.5 billion of cash in short-term investments and a net leverage ratio of 1.2. Inventory decreased $51 million sequentially, and days declined to 178 from 192. As planned, we reduced channel inventory further this quarter, with weeks ending near the low end of our seven- to eight-week target. Operating cash flow for the quarter and trailing 12 months was $0.9 billion and $4 billion, respectively. CapEx for the quarter and trailing 12 months was $154 million and $1 billion, respectively. For fiscal 24, CapEx is tracking to our $700 million plan, which is down roughly 45% versus 2023 as our hybrid manufacturing investment cycle tapers. Not included in these figures are the anticipated benefits from both the European and U.S. CHIPS Acts. During the last 12 months, we generated $2.9 billion of free cash flow, or 30% of revenue. Over this same time period, we have returned $2.8 billion via dividends and share repurchases. As a reminder, our strategy is to return 100% of our free cash flow to our shareholders over the long term. Now I will turn to the fourth quarter outlook. Revenue is expected to be $2.4 billion, plus or minus $100 million, up 4% sequentially at the midpoint. We expect sell-through to be roughly equal to sell-in this quarter. At the midpoint on a sequential basis, we expect industrial and consumer to increase, communications to be flattish, and automotive to decrease. Operating margins are expected to be 41%, plus or minus 100 basis points. Our tax rate is expected to be between 11% and 13%, and based on these inputs, EPS is expected to be $1.63, plus or minus 10 cents. In closing, our third quarter results and fourth quarter outlook support our view that we have passed this cycle's trough. However, challenging economic and geopolitical conditions are limiting a faster demand recovery. I will now give it back to Mike for Q&A.

Thanks, Rich. Let's get to our Q&A session. We ask that you limit yourself to one question in order to allow for additional persistence on the call this morning. If you have a follow-up question, please re-queue, and we'll take your question if time allows. With that, we'll do our first question, please.

For those participating by telephone dial-in, if you have a question, please press star 1-1 on your telephone to enter the queue. If your question has been answered and you wish to be removed from the queue, please press star 1-1 again. If you're listening on a speakerphone, please pick up the handset when asking your question. We'll pause for just a moment to compile our Q&A roster. Our first question comes from Tori Svenberg with Stiefel. Your line is open.

Yes, thank you so much. Great to see the turn here. Vince, could you maybe elaborate a little bit more on this sort of mixed environment, right? Because inventories have bottomed, you know, excess inventories have bottomed. At the same time, end demand seems to be kind of mixed. So as you navigate through, you know, this period, could you elaborate a little bit on your visibility? You know, how's backlog trending? Are you finally starting to see new products ramping more into production? Because these are typical scenarios. signals that you want to see at the beginning of a new cycle?

Yeah, thanks, Tory. Well, I'd say, I mean, first and foremost, we run this company on POS signals. That's how we plan our production, how we run the company operationally. So we pay very, very close attention to what's happening in terms of the end market demand. And, you know, my confidence has increased since last quarter that indeed 2Q was the cyclical bottom. We've exited 3Q with very, very lean channel inventory. We've taken inventory off our own balance sheet, though we're positioned with a very, very healthy backlog of inventory on our own balance sheet so that the anticipated demand upsurge that we expect in 2025, we're very, very well equipped and ready to meet that. You know, in the fourth quarter, as we've said, we expect to see continued sequential growth. And indeed, we'll also see, I think, particularly in the industrial area, continued improvement on customer inventory levels. So, look, it's all the whole recovery, you know, the ramp of the recovery will depend on the macro situation. But nonetheless, given the design wins, we've a record design win pipeline in the company. So we're facing many, many secular tailwinds with a very strong pipeline, very, very good supply line, and with a very, very lean inventory on the customer's balance sheet. So that gives me the optimism, Tory, that we're very, very well positioned coming into the new year.

Thank you. One moment for our next question. Our next question comes from Joseph Moore with Morgan Stanley. Your line is open.

Yes, thank you. My question is on the trajectory of automotive versus industrial. You know, it seems like automotive entered into an inventory correction a little bit later and so far has been much less severe. I guess you sort of talked about some ongoing headwinds in that space. Can you just talk about, you know, what overall drawdown might you expect in automotive and where are we in customers kind of drawing down safety stock inventory?

So, Joe, this is Rich, and I'll take a crack at that one. So just to level set a little bit, you know, from our perspective and what we're seeing in the market, cars continue to become more electric and software-defined, which is also driving our semi-content growth, largely trying to address increased battery densities, more sensors, displays. And we do expect that that is going to be a long-term tailwind to our business. However, and this is where we're starting to see some of the pullback, The vehicle market has softened in the near term. We're seeing our customers pull back on their production. And at this point, we're seeing them start to choose to burn off some inventory. So we are seeing that. The softness is evidenced in our results. Auto's been down year over year for two straight quarters, and we expect it will be down again in 4Q. And from a bookings perspective, we did see a decline in bookings in auto. In particular, we've seen inventory digestion in our legacy auto and in our BMS portfolios, and we expect that that's going to continue into at least the fourth quarter, particularly when you consider the challenging purchasing environment that currently exists for customers. However, to your question around the peak to trough, you know, unless SAR returns to, you know, to pandemic levels, you know, we don't see the peak to trough being nearly as dramatic as we saw in our other end markets. You know, the underlying secular growth trends that I described, You know, driving higher semi-content. Also, we've continued to see more penetration and value capture across all vehicle types, whether it's ICE, plug-in hybrid electric, or full electric in the fastest growing applications. If you think about that, ADAS, digital cockpit, and electrification. So, we will be down, but we don't expect that the cycle depth to be as severe as we saw, for example, in industrial.

Great. Thank you very much. And I guess as a follow-up, are you seeing that behavior any different regionally? Is the China automotive market different than the Western markets in terms of where they are?

No. I would say overall, it's pretty unanimous across all markets. I would say China did okay. We toggled some design and ramping there, so that's helping offset some of the softness. But it's an overall comment. Auto is a bit weaker today than it was 90 days ago, whether it's North America, Europe, or Asia.

Great. Thank you very much.

One moment for our next question. Our next question comes from Vivek Arya with Bank of America Securities. Your line is open.

Thanks for taking my question. I'm glad to hear about your optimism about turning the cyclical corner. Do you think the environment allows for sequential growth to continue into Q1? You know, it seems like industrial could grow. Autos, I'm not sure, given some of the bookings. commentary and consumer tends to be down seasonally. So just conceptually, how should we model the shape of this recovery into Q1? Thank you.

Yeah, well, at this point, you know, it's hard to call given that the environment is still a little, let's say there's a bit of disequilibrium. But I think generally speaking, we would probably expect to see a bit of a seasonal decline in the first quarter and then bounce back in the second. I think that's the sentiment. But overall, I maintain my outlook that we will see a brisk growth here in 2025.

I'll help you out a little bit on the seasonality question. It's been a few years now since we've seen seasonal trends in our business. You're right. If you look back over the past 10, 15 years for ADI, consumers are down 10% plus sequentially in 1Q. And the B2B markets of industrial, auto, and comms are down low single digits. And as Ben said, there's probably no belief today that we'd be any better than seasonal given where we are today. But we'll update you in 90 days of how we feel about 1Q.

Yeah, I think the big modulator for us will be what happens in industrial in particular. And what I can tell you is that the various C-suite conversations I've had with our industrial customers would suggest that their optimism is also strong for 2025.

Thank you. One moment for our next question. Our next question comes from Timothy Akari with UBS. Your line is open.

Thanks a lot. I just wanted to ask on that answer. So you were above seasonal in fiscal Q3. You're above seasonal in fiscal Q4. Sounds like you're not willing to commit that you're going to be above seasonal in fiscal Q1. The streets modeling... like 5% or 6% above seasonal for fiscal Q1. Was there something that happened in bookings? Did bookings slow in the last couple weeks or the last month or something to make you not want to commit to the fact that fiscal Q1 would be above seasonal or just that it's 90 days away and you just don't want to comment on it? Thanks.

I'll start out on the street expectations and then we can rake down a little about bookings. We never got to 1Q. I think the street makes up the street expectation for 1Q. I think the street has everyone better than seasonal for a calendar 4Q or a fiscal 1Q on the hope of a snapback. I would say, yeah, there are things that have changed in 90 days, but we're optimistic about 25 as a full year. We just don't know if it's above seasonal in that outlook for a good year in 25. I'll pass it to Rich to go through some of the bookings dynamics.

Yeah, so Tim, from a bookings perspective, up until Q2, as we talked about, We'd seen three straight quarters of broad-based bookings improvement. However, Q3 was different. We saw continued bookings growth for industrial, consumer, and communications, but we did see automotive orders decline, which resulted in a modest drop in our total bookings during the quarter. We did still end with a book to bill around parity. You know, and if I look at it from a geographic perspective, Regionally, bookings were the weakest in Europe. America's was modestly weaker, which offset bookings' growth in Asia.

Thanks a lot.

One moment for our next question. Our next question comes from Toshai Hari with Goldman Sachs. Your line is open.

Hey, good morning. Thanks for taking the question. It was good to see inventory on your balance sheet come down again, and you guys spoke to channel inventory coming down as well. As you look forward, what are your thoughts on utilization rates internally? How are you engaging with your foundry partners, and what's embedded in your October quarter outlook as it pertains to the channel? Thank you.

So, as I noted in the last call, we said both utilization and, in fact, gross margins had bottomed in Q2, and that is proving to be true. From an inventory in the channel perspective, the expectation is we will ship to end demand. We are currently at the very low end of our range in the channel at seven to eight weeks. And I think we'd mentioned previously if we saw continued improvements, we would start shipping to end demand. So we will do that in the fourth quarter.

Thank you. Obviously, when it comes to, you know, the balance, we have a hybrid manufacturing system, which enables us to keep utilization rates as high as possible internally, and, you know, when Our factories run out of capacity, then we have lots of choices externally for silicon capacity. So, you know, obviously we've got a lot of inventory on the balance sheet, and our factories are, you know, well, well capable of improving utilization rates as the demand continues to improve over the coming course.

As a quick follow-up, I think your internal utilization rates last quarter were in the mid-50s, if I'm not mistaken. Are you at or above 60% at this point?

You can comment on that. We haven't given an outlook on utilization, nor did we give the rate. I would say they were lower last quarter, moving higher here in 3 and 4Q. And they're well off the normal levels of what I would call 85% to 90% utilization rate. Got it, thank you. I'll give you some little context. What does this mean, edulation ramp? What does that mean for gross margins? If you look at the decline of gross margins over the past year or so, about half the decline relates to utilization. The other half relates to mix. So you can see edulation pick up what that means for gross margin expansion.

Helpful, thank you.

One moment for our next question. Our next question comes from Stacy Raskin with Bernstein Research. Your line is open.

Hi, guys. Thanks for taking my question. I was hoping you could give us a little more granularity on the segment guide for next quarter. I know you said industrial and I think consumer up and auto down. Any more further color on that? Like is consumer usually up? Is it up double digits? Is industrial up mid-single, auto down like low single? Any further color you could give us on those segments would be helpful.

Sure, Stacy. I'll grab that one. Yeah, so let's start at consumer. You're right. Consumer is up about double digits again, about 10% or so embedded in our outlook. Industrial has another, I'll call it solid growth quarter, probably high single digits sequentially. Communication is about flatness plus minus, depending on how things go here. And all those, the wheat market, as we discussed and hit a little bit earlier on the call, is probably down low single digits sequentially.

Got it. That's helpful. And if I could give a quick follow-up just How are you thinking about OPEX growth in the next quarter? It was pretty well under control this quarter. Is there anything that drives that up? Like, what do you think about the OPEX trends as we're going to the end of the year?

So, Stacy, I'll take that one. So, you know, obviously we exceeded the high end of our outlook in the third quarter, you know, given the beat on gross margin and revenue, as well as our continued cost management. Our Q4 guide obviously does imply a modest margin contraction sequentially. despite our expectation for higher revenue and gross margin. You know, the main driver for that is our increase for merit increases that will go into effect during the fourth quarter. So that will be a downward pressure as we head into the fourth quarter.

I mean, the big modulator on our OPEX, Stacey, is obviously the bonus. And, you know, that obviously with declining profit and revenue over the past several quarters, that dropped accordingly. Now, with increase, with growth in revenue and improvement in profitability, that will obviously increase, but that's self-funding, so to speak.

How much does the OPEX go up, then?

For a fourth-year outlook, the sequential increase in OPEX is around 5%.

That's great. Thank you so much. Appreciate it, guys.

One moment for our next question. Thanks. Our next question comes from Chris Dainley with Citi. Your line is open.

Hey, thanks, guys. First, just a little clarification on inventory in the auto market. Vince, I think at the beginning you talked about inventory is very lean out there, but then you're also saying that there's inventory digestion going on in the automotive market. Can you just expand on that a little bit?

John, I'll get to that, and then Vince talks about overall customer inventory. Yeah, I think every market responds to different cases of inventory digestion. We feel good about industrial consumer comms have really normalized inventory levels. There are pockets on the auto side that are still, I'll call it, digesting. I mean, production levels have been cut over the past quarter, whether it's an ICE car or an EV car. That impacts inventory levels and desire to hold inventory on their balance sheets. From that standpoint, Chris, I don't know, Benjamin, anything to add?

Yeah, I think, Chris, overall, you know, we've seen the worst is behind us, I think, in industrial consumer and comms markets. But automotive, I think, is a sector where we will see some inventory digestion issues into at least the early part of 2025.

Great. Thanks. That's helpful. And then just a quick clarification on industrial. How would you characterize your, I guess, booking slash visibility on the industrial market now versus three months ago? Is it roughly the same or has it improved a little bit?

Okay. Hey, Chris, it's Rich. I would say our visibility is pretty consistent. And as we talked about, we're seeing continuing growth sequentially across all of the sub-elements of industrial with the exception of automation, which we are seeing improvements but not yet seeing growth.

Got it. Thanks, Rich.

One moment for our next question. Our next question comes from Holland, sir, with JP Morgan. Your line is open.

Good morning. Thanks for taking my question. So for fiscal 23, China domestic consumption, I think it was about 18% of their total revenues. It was the worst performing geography. Last couple of quarters, right, bookings in China have been growing sequentially. Did that translate into sequential revenue growth out of the region in the July quarter? And then it looks like orders from the China region grew sequentially in July. How are they trending so far quarter to date? Are you still seeing sort of positive signs out of this region?

Yeah, we excuse me. We continue to see strong performance from a bookings perspective in China. You know, we did see double digit growth across industrial auto and comms, you know, being slightly offset by a decrease in consumer. So China does continue to perform well, and our design win and our pipeline there are very strong.

Yep. Thank you.

One moment for our next question. Our next question comes from Joshua Butchalter with TD Cowan. Your line is open.

Hey, guys. Thanks for taking my question. Maybe you can walk through some of the puts and takes into gross margin into the October quarter. Back the envelope, I'm getting to roughly stable sequentially despite the revenue increase, and I imagine utilization is improving as well. How much of that is mixed, and in particular, any changes in the pricing environment as we get sort of through this digestion into what I would imagine is a more competitive environment? Thank you.

Yeah, I would say it's, you know, as we previously mentioned, It is significantly impacted by the favorable mix. Obviously, we get a benefit out of the revenue upside. From a pricing perspective, and I've talked about this before, we continue to see pretty stable pricing, and I do expect that to continue. Obviously, it's different by geography and for big and small customers, but on balance, we are continuing to see stable pricing, and I expect we will see that going forward.

You know, once our products are installed in a particular customer's design, they tend to, I mean, in the industrial business, they will stay for decades, and pricing is very, very stable there. Where the pricing or the competitiveness amps up is for new sockets, new wins. But nothing is new there. You know, we as a company, we play on the high end of the game in terms of innovation, service, support, and so on and so forth. That's the game we play and the game we will continue to play. We significantly higher ASPs than most and those ASPs increase with each new generation of product. So I think overall, as Rich said, the pricing environment is stable and so I don't see that as a headwind on margin.

Thank you. Thanks, Josh. I think that's all the time we have for questions today. I thought we had a little more time, but it's August. You guys can go out there and enjoy the weather a bit. So thanks for joining the call. I look forward to future calls with you guys, and have a great rest of the summer. Thank you.

This concludes today's Analog Devices Conference call. You may now disconnect. Hello. Thank you. Thank you. Thank you. 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 SP&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 related 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. As a result, it could differ materially from the forward-looking information if these statements reflect our expectations only at the date of this call. 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 excluded special items. When comparing our results or historical performance, special items are also excluded from prior periods. Reconciliations of these non-GAAP measures, 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 CEO and Chair, 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 Aurif and 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 SAM 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 power 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.

And so with that, I'm going to turn it over to Rich, who will take you through the numbers. Thank you, Vince.

Let me add my welcome to our third quarter earnings call. Third quarter revenue of $2.31 billion came in above the midpoint of our outlook, finishing up 7% sequentially and down 25% year over year. Industrial represented 46% of revenue in the third quarter, finishing up 6% sequentially and down 37% year over year. Every major application increased sequentially except for automation, which declined at a much slower pace than it had in previous quarters. Automotive represented 29% of revenue, finishing flat sequentially and down 8% year over year. We saw continued double-digit growth year over year for our industry-leading connectivity, and functionally safe power platforms. Conversely, automotive production cuts are extending inventory digestion across customers, particularly impacting our legacy automotive and electrification businesses. Communications represented 12% of revenue, finishing up 10% sequentially and down 26% year over year. Slowing customer inventory digestion enabled both wireless and wireline growth sequentially. And lastly, consumer represented 14% of revenue, finishing up 29% sequentially and increased year over year for the first time since 2022. We saw diversified growth across applications with notable strength in portables and gaming. Now let's move from the top line to the rest of the P&L. Third quarter gross margin was 67.9%, up 120 basis points sequentially, driven by higher revenue, higher utilization, and favorable mix. Operating expenses in the quarter were 619 million, up modestly sequentially, driven primarily by higher variable compensation. Operating margin of 41.2% exceeded the high end of our outlook. Non-operating expenses finished at 70 million, and the tax rate for the quarter was 10.8%. The net result was EPS of $1.58, which finished near the high end of our outlook. Our financial position is solid, and I'd like to call out a few items from our balance sheet and cash flow statement. We ended Q3 with more than $2.5 billion of cash in short-term investments and a net leverage ratio of 1.2. Inventory decreased $51 million sequentially, and days declined to 178 from 192. As planned, we reduced channel inventory further this quarter, with weeks ending near the low end of our seven- to eight-week target. Operating cash flow for the quarter and trailing 12 months was $0.9 billion and $4 billion, respectively. CapEx for the quarter and trailing 12 months was $154 million and $1 billion, respectively. For fiscal 24, CapEx is tracking to our $700 million plan, which is down roughly 45% versus 2023 as our hybrid manufacturing investment cycle tapers. Not included in these figures are the anticipated benefits from both the European and U.S. CHIPSACs. During the last 12 months, we generated $2.9 billion of free cash flow, or 30% of revenue. Over this same time period, we have returned $2.8 billion via dividends and share repurchases. As a reminder, our strategy is to return 100% of our free cash flow to our shareholders over the long term. Now I will turn to the fourth quarter outlook. Revenue is expected to be $2.4 billion, plus or minus $100 million, up 4% sequentially at the midpoint. We expect sell-through to be roughly equal to sell-in this quarter. At the midpoint, on a sequential basis, we expect industrial and consumer to increase, communications to be flattish, and automotive to decrease. Operating margins are expected to be 41%, plus or minus 100 basis points. Our tax rate is expected to be between 11% and 13%, and based on these inputs, EPS is expected to be $1.63 plus or minus 10 cents. In closing, our third quarter results and fourth quarter outlook support our view that we have passed this cycle's trough. However, challenging economic and geopolitical conditions are limiting a faster demand recovery. I will now give it back to Mike for Q&A.

Thanks, Rick. Let's get to our Q&A session. We ask that you limit yourself to one question in order to allow for additional persistence on the call this morning. If you have a follow-up question, please review, and we'll take your question if time allows. With that, we'll do our first question, please.

For those participating by telephone dial-in, if you have a question, please press star-1-1 on your telephone to enter the queue. If your question has been answered and you wish to be removed from the queue, please press star-1-1 again. If you are listening on a speakerphone, please pick up the handset when asking your question. We'll pause for just a moment to compile our Q&A roster. Our first question comes from Tori Svenberg with Stifel. Your line is open.

Yes. Thank you so much. Great to see the turn here. Vince, could you maybe elaborate a little bit more on this sort of mixed environment, right? Because inventories have bottomed, you know, excess inventories have bottomed at the same time and demand seems to be kind of mixed. So as you navigate through, you know, this period, could you elaborate a little bit on your visibility? You know, how's backlog trending? Are you finally starting to see new products ramping more into production? Cause these are typical sign signals that you want to see at the beginning of a new, new cycle.

Yeah. Thanks. Sorry. Well, I'd say, I mean, first and foremost, uh, we run this company on POS signals. That's how we plan our production, how we run the company operationally. Uh, so we pay very, very close attention to what's happening in terms of the, the end market demand. And, you know, my confidence has increased since last quarter that, indeed, 2Q was the cyclical bottom. You know, we've exited 3Q with very, very lean channel inventory. We've taken inventory off our own balance sheet, though we're positioned with a very, very healthy backlog of inventory on our own balance sheet so that the anticipated demand upsurge that we expect in 2025 We're very, very well equipped and ready to meet that. So, you know, in the fourth quarter, as we've said, we expect to see continued sequential growth. And indeed, we'll also see, I think, particularly in the industrial area, continued improvement on customer inventory levels. So, look, it's all the whole recovery process. You know, the ramp of the recovery will depend on the macro situation. But nonetheless, given the design wins, we've a record design win pipeline in the company. So we're facing many, many secular tailwinds with a very strong pipeline, very, very good supply line, and with a very, very lean inventory on the customer's balance sheet. So that gives me the optimism, Tory, that... We're very, very well positioned coming into the new year.

Thank you. One moment for our next question. Our next question comes from Joseph Moore with Morgan Stanley. Your line is open.

Yes, thank you. My question is on the trajectory of automotive versus industrial. You know, it seems like automotive entered into an inventory correction a little bit later and so far has been much less severe. I guess you sort of talked about some ongoing headwinds in that space. Can you just talk about, you know, what overall drawdown might you expect in automotive, and where are we in customers kind of drawing down safety stock inventory?

So, Joe, this is Rich, and I'll take a crack at that one. So just to level set a little bit, you know, from our perspective and what we're seeing in the market, cars continue to become more electric and software-defined, which is also driving our semi-content growth largely trying to address increased battery densities, more sensors, displays. And we do expect that that is going to be a long-term tailwind to our business. However, and this is where we're starting to see some of the pullback, the vehicle market has softened in the near term. We're seeing our customers pull back on their production. And at this point, we're seeing them start to choose to burn off some inventory. So we are seeing that, right? The softness is evidence in our results. But auto's been down year over year for two straight quarters, and we expect it will be down again in 4Q. And from a bookings perspective, we did see a decline in bookings in auto. In particular, we've seen inventory digestion in our legacy auto and in our BMS portfolios, and we expect that that's going to continue into at least the fourth quarter, particularly when you consider the challenging purchasing environment that currently exists for customers. However, to your question around the peak to trough, You know, unless SAR returns to, you know, to pandemic levels, you know, we don't see the peak to trough being nearly as dramatic as we saw in our other end markets. You know, the underlying secular growth trends that I described, you know, driving higher semi-content. Also, we've continued to see more penetration and value capture across all vehicle types, whether it's ICE, plug-in hybrid electric, or full electric in the fastest growing applications, if you think about that. ADAS, digital cockpit, and electrification. So we will be down, but we don't expect that the cycle depth to be as severe as we saw, for example, in industrial.

Great. Thank you very much. And I guess as a follow-up, are you seeing that behavior any different regionally? Is the China automotive market different than the Western markets in terms of where they are?

No, I would say overall, it's pretty unanimous across all markets. I would say China Auto SE did okay. We toggled some design with ramping there, so that's helping offset some of the softness. But it's an overall comment. Auto is a bit weaker today than it was 90 days ago, whether it's North America, Europe, or Asia.

Great. Thank you very much.

One moment for our next question. Our next question comes from Vivek Arya with Bank of America Securities. Your line is open.

Thanks for taking my question. I'm glad to hear about your optimism about turning the cyclical corner. Do you think the environment allows for sequential growth to continue into Q1? You know, it seems like industrial could grow. Autos, I'm not sure, given some of the bookings, commentary, and consumer tends to be down seasonally. So just conceptually, how should we model the shape of this recovery into Q1? Thank you.

Yeah, well, at this point, you know, it's hard to call, given that the environment is still a little, let's say there's a bit of disequilibrium. But I think generally speaking, we would probably expect to see a bit of a seasonal decline in the first quarter, and then, you know, a bounce back in the second. And I think that's the sentiment. But overall, you know, I maintain my outlook that we will see a brisk growth here in 2025.

I'll help you out a little bit on the seasonality question. It's been a few years now since we've seen seasonal trends in our business. You're right. If you look back over the past 10, 15 years for ADI, consumers are down 10% plus sequentially in 1Q. And the B2B markets of industrial, auto, and comms are down low single digits. And as Ben said, there's probably no belief today that we'd be any better than seasonal given where we are today. But we'll update you in 90 days of how we feel about 1Q.

I think the big modulator for us will be what happens in industrial in particular. And what I can tell you is that The various C-suite conversations I've had with our industrial customers would suggest that their optimism is also strong for 2025.

Thank you. One moment for our next question. Our next question comes from Timothy Arcuri with UBS. Your line is open.

Thanks a lot. I just wanted to ask on that answer. So you were above seasonal in fiscal Q3. You were above seasonal in fiscal Q4. Sounds like you're not willing to commit that you're going to be above seasonal in fiscal Q1. The street's modeling like 5% or 6% above seasonal for fiscal Q1. Was there something that happened in bookings? Did bookings like slow in the last couple weeks or the last month or something to make you not want to commit to the fact that fiscal Q1 would be above seasonal or just that it's 90 days away and you just don't want to comment on it? Thanks.

I'll start out on the street expectations and then we can riff a little about bookings. We never got to 1Q. I think the street makes up the street expectation for 1Q. I think the street has everyone better than seasonal for a calendar 4Q or a fiscal 1Q in the hope of a snapback. I would say, yeah, there are things that have changed in 90 days, but we're optimistic about 25 as a full year. We just don't know if it's above seasonal in that outlook for a good year in 25. I'll pass it to Rich to go through some of the bookings dynamics.

Yeah, so Tim, from a bookings perspective, up until Q2, as we talked about, We'd seen three straight quarters of broad-based bookings improvement. However, Q3 was different. We saw continued bookings growth for industrial, consumer, and communications, but we did see automotive orders decline, which resulted in a modest drop in our total bookings during the quarter. We did still end with a book to bill around parity. You know, and if I look at it from a geographic perspective, Regionally, bookings were the weakest in Europe. America's was modestly weaker, which offset bookings' growth in Asia.

Thanks a lot.

One moment for our next question. Our next question comes from Toshai Hari with Goldman Sachs. Your line is open.

Hey, good morning. Thanks for taking the question. It was good to see inventory on your balance sheet come down again, and you guys spoke to channel inventory coming down as well. As you look forward, what are your thoughts on utilization rates internally? How are you engaging with your foundry partners, and what's embedded in your October quarter outlook as it pertains to the channel? Thank you.

So, as I noted in the last call, we said both utilization and, in fact, gross margins had bottomed in Q2, and that is proving to be true. From an inventory in the channel perspective, the expectation is we will ship to end demand. We are currently at the very low end of our range in the channel at seven to eight weeks. And I think we've mentioned previously, if we saw continued improvements, we would start shipping to end demand. So we will do that in the fourth quarter.

Thank you. Obviously, when it comes to, you know, the balance, we have a hybrid manufacturing system, which enables us to keep utilization rates as high as possible internally, and, you know, Our factories run out of capacity, then we have lots of choices externally for silicon capacity. So, you know, obviously we've got a lot of inventory on the balance sheet, and our factories are, you know, well, well capable of improving utilization rates as the demand continues to improve over the coming quarter.

As a quick follow-up, I think your internal utilization rates last quarter were in the mid-50s, if I'm not mistaken. Are you at or above 60% at this point?

We haven't given an outlook on utilization, nor did we give the rate. I would say they were lower last quarter, moving higher here in 3 and 4Q. And they're well off the normal levels of what I would call 85% to 90% utilization rate. Got it, thank you. I'll give you some little context. What does this mean as you listen to RAMP? What does that mean for gross margins? If you look at the decline of gross margins over the past year or so, about half the decline relates to utilization. The other half relates to mix. So you can see as you listen to pick up what that means for gross margin expansion.

Helpful, thank you.

One moment for our next question. Our next question comes from Stacy Raskin with Bernstein Research. Your line is open.

Hi, guys. Thanks for taking my question. I was hoping you could give us a little more granularity on the segment guide for next quarter. I know you said industrial and I think consumer up and auto down. Any more further color on that? Like is consumer usually up? Is it up double digits? Is industrial up mid-single, auto down like low single like big? Any further color you could give us on those segments would be helpful.

Sure, don't grab that one. Yeah, so let's start with consumer. You're right, consumer is up about double digits again, about 10% or so embedded in our outlook. Industrial has another, I'll call it solid growth quarter, probably high single digits sequentially. Communication is about flattish, plus, minus, depending on how things go here. And all those, the weak market, as we discussed and hit a little bit earlier on the call, is probably down low single digits sequentially.

Got it. That's helpful. And if I could give a quick follow-up just How are you thinking about OPEX growth in the next quarter? It was pretty well under control this quarter. Is there anything that drives that up? Like, what do you think about the OPEX trends as we're going to the end of the year?

So, Stacy, I'll take that one. So, you know, obviously we exceeded the high end of our outlook in the third quarter, you know, given the beat on gross margin and revenue, as well as our continued cost management. Our Q4 guide obviously does imply a modest margin contraction sequentially. despite our expectation for higher revenue and gross margin. You know, the main driver for that is our increase for merit increases that will go into effect during the fourth quarter. So that will be a downward pressure as we head into the fourth quarter.

I mean, the big modulator on our OPEX, Stacy, is obviously the bonus. And, you know, that obviously with declining profit and revenue over the past several quarters, that dropped accordingly. Now, with increase, with growth in revenue and improvement in profitability, that will obviously increase, but that's self-funding, so to speak.

How much does the OPEX go up, then?

For a fourth-year outlook, I would say the sequential increase in OPEX is around 5%.

That's great. Thank you so much. Appreciate it, guys.

One moment for our next question. Our next question comes from Chris Dainley with Citi. Your line is open.

Thanks, guys. First, just a little clarification on inventory in the auto market. Vince, I think at the beginning you talked about inventory is very lean out there, but then you're also saying that there's inventory digestion going on in the automotive market. Can you just expand on that a little bit?

John, I'll grab that, and then Vince will talk about the overall customer inventory. Yeah, I think every market responds to different cases of inventory digestion. We feel good about industrial consumer comms have really normalized inventory levels. There are pockets on the auto side that still, I'll call it digesting. I mean, production levels have been cut over the past quarter, whether it's an ICE car or an EV car. That impacts inventory levels and desire to hold inventory on their balance sheets. From that standpoint, Chris, I don't know if there's anything to add.

Yeah, I think, Chris, overall, you know, we've seen the worst is behind us, I think, in industrial consumer and comms markets. But automotive, I think, is a sector where we will see some inventory digestion issues into at least the early part of 2025.

Great. Thanks. That's helpful. And then just a quick clarification on industrial. How would you characterize your, I guess, booking slash visibility on the industrial market now versus three months ago? Is it roughly the same or has it improved a little bit?

Okay. Hey, Chris, it's Rich. I would say our visibility is pretty consistent. And as we talked about, we're seeing continuing growth sequentially across all of the sub-elements of industrial with the exception of automation, which we are seeing improvements but not yet seeing growth.

Got it. Thanks, Rich.

One moment for our next question. Our next question comes from Holland, sir, with JP Morgan. Your line is open.

Good morning. Thanks for taking my question. So for fiscal 23, China domestic consumption, I think it was about 18% of their total revenues. It was the worst performing geography. Last couple of quarters, right, bookings in China have been growing sequentially. Did that translate into sequential revenue growth out of the region in the July quarter? And then it looks like orders from the China region grew sequentially in July. How are they trending so far quarter to date? Are you still seeing sort of positive signs out of this region?

Yeah, we excuse me. We continue to see strong performance from a bookings perspective in China. You know, we did see double digit growth across industrial auto and comms, you know, being slightly offset by a decrease in consumer. So China does continue to perform well, and our design win and our pipeline there are very strong.

Yep. Thank you.

One moment for our next question. Our next question comes from Joshua Butchalter with TD Cowan. Your line is open.

Hey, guys. Thanks for taking my question. Maybe you can walk through some of the puts and takes into gross margin into the October quarter. Back the envelope, I'm getting to roughly stable sequentially despite the revenue increase, and I imagine utilization is improving as well. How much of that is mixed, and in particular, any changes in the pricing environment as we get sort of through this digestion into what I would imagine is a more competitive environment? Thank you.

Yeah, I would say it's, you know, as we previously mentioned, It is significantly impacted by the favorable mix. Obviously, we get a benefit out of the revenue upside. From a pricing perspective, and I've talked about this before, we continue to see pretty stable pricing, and I do expect that to continue. Obviously, it's different by geography and for big and small customers, but on balance, we are continuing to see stable pricing, and I expect we will see that going forward.

You know, once our products are installed in a particular customer's design, they tend to, I mean, in the industrial business, they will stay for decades, and pricing is very, very stable there. Where the pricing or the competitiveness amps up is for new sockets, new wins. But nothing is new there. You know, we as a company, we play on the high end of the game in terms of innovation, service, support, and so on and so forth. That's the game we play in the game. We will continue to play, you know, we significantly higher ASPs than most and You know those ASPs increase with each new generation of product.

So I think overall as Richard the pricing environment stable and So I don't see that as a headwind on margin Thank you Thanks, Josh, I think that's all the time we have for questions today a little more time but it's August you guys can go out there and enjoy the weather a bit and So thanks for joining the call. I look forward to future calls with you guys, and have a great rest of the summer. Thank you.

This concludes today's Analog Devices Conference call. You may now disconnect.