Analog Devices Inc (ADI) Q2 2024 Earnings Transcript Highli

Release date: May 22, 2024

For a complete transcript of the earnings call, please see Full Earnings Call Transcript.

Positive points

• Analog Devices Inc (ADI, Financial) reported second-quarter revenue of $2.16 billion, beating the midpoint of their guidance.
• The company believes it has passed the low point in the cycle, with global manufacturing PMIs improving and customer inventories stabilizing.
• ADI has achieved significant success in the healthcare sector, particularly in surgical robotics and continuous glucose monitoring.
• The company has seen strong performance in the automotive sector, driven by higher content vehicles and increased design success.
• ADI uses AI to improve product offerings and internal operations, preparing for future growth in AI-related markets.

Negative points

• Second quarter revenues declined 34% year over year, indicating a significant decline compared to the prior year.
• Industry revenue, which accounts for 47% of total revenue, fell 44% year-on-year due to inventory digestion.
• Automotive revenue, representing 30% of total revenue, fell 10% year-on-year, with widespread declines offset by growth in specific areas.
• Communications revenue, representing 11% of total revenue, declined 45% year over year due to weaker demand and inventory utilization.
• Consumer revenue, also representing 11% of total revenue, fell 9% year over year, with declines affecting most applications.

The most important questions and answers

Q: Congratulations on finding a way to regain your health here. I had a question about the outlook for the third quarter, especially in industry. I think you indicated that you expect industrials to be the strongest performer this quarter. I was hoping you could talk a little bit about what’s behind this strength between end-market demand, inventory replenishment, and whether there are any sub-segments in the industry that are driving this great growth.
AND: Sure, Tore. This is Rich and I’ll take this one. So industrial is obviously our most diversified and profitable end market, and it weathered an unprecedented, broad-based inventory correction last year. Importantly, we expect that Q2 was the lowest for the industry and will increase in the second half, starting from Q3. Stronger PMIs support broad bookings, which we have seen for three quarters in a row. As noted in the prepared remarks, we plan to further reduce channel resources in the third quarter, which has a greater impact on the industrial market than any other. This will be more than a year of underconsumption, which is one of the reasons we believe inventory problems in the industrial sector have stabilized. Given this momentum and the exciting project wins and AI positive tailwinds in our instrumentation and test industry that Vince mentioned, we have a strong sense that we are at the beginning of an industry recovery.

Q: I wanted to ask about book-to-bill payment. So is it above 1, is it above 1 in all segments? Or is it just above 1 in the industry?
AND: Yes. This is indeed the case – good question. All end markets are above 1. But not all end market applications are above 1. And if you think about the shape of those bookings throughout the quarter, we — we talked about the last earnings call, bookings have improved. They started below par and ended the quarter above par, across all markets and geographies. But once again, these are not all applications. In the last question, we talked a little bit about applications above 1. You could think about some instrumentation, some automation, some aerospace and defense. So the main takeaway is a broad-based improvement in bookings across all markets and geographies.

Q: I wanted to ask about the second half of the calendar year and what you think about the shape of economic recovery. Vince, you’ve been through a lot of cycles. I think that typically in the same way that we underestimate the pace of the economic downturn, we collectively underestimate the pace of the recovery. I’m curious if you expect this improvement to be similar to previous cycles and whether we will follow these patterns in some sense? Or are you seeing anything in the market today or anything from customers that would point to something fundamentally different in terms of the shape of the economic recovery?
AND: Yes. Thank you, Toshiya. So yes, first of all, we think we have seen the bottom of the cycle. As Mike noted, the higher PMIs we’ve seen, particularly in the industrial sector, give us a lot of confidence and there is a strong correlation between our industrial business, which accounts for about half of the company’s total revenue. So, and as we have said several times, bookings and backlog coverage for the next few months after this quarter clearly indicate that we expect continued growth in the second half of the year. I also want to emphasize that I think 2025 will be a year of rapid growth, I think. And we are asked all the time, what shape will it take? Well, I don’t know what the exact shape will be, but I think we’re on an upward trajectory. We have full confidence in this.

Q: What is the right way to understand the true change in final demand if we set aside all inventory fluctuations? For example, is it worth checking how distribution sales performed year-over-year in the second quarter and what are the assumptions for the third quarter? And does this in any way inform us whether the fourth quarter may be seasonal, whatever the version of seasonality is? I’m just trying to properly look at what end demand is doing, putting aside all the inventory noise.
AND: Yes. Yes. Look, I think it’s a very difficult question to answer simply because when you write history, we’re going to get an average of what happened, before and after the pandemic. So there was so much ringing in the system, demand was above and then below. However, I feel, especially from our perspective, that we are in a very good position to be able to take advantage if the situation grows faster than we expect. We have plenty of inventory on our balance sheet. We kept inventory closer to ADI and less further down the supply chain. And with that, we also have a positive impact on AI that I think will last for many years, so that’s pushing us forward. But at the same time, we have – we still have high interest rates. We still have relatively high inflation in many places. So I think ultimately the size and pace of the economic recovery will have strong economic and geopolitical implications. But overall, I feel like we’re going to see good growth for the rest of this year and strong growth in ’25, and beyond that, I think we have many, many growth drivers that we’re very confident about. We sell more value to each of our customers in each of our segments. I feel good about the current position of the intermediates industry, as well as overall demand as edge devices become more intelligent and the cloud expands. So it is very, very difficult to give you an answer to the question of what can be accepted and accepted. I mean the dynamics of a relatively short period that are difficult to decipher. However, we can say that based on current PMIs and our demand, we are in recovery.

Q: Can you talk about the factors that impact gross margin? We might touch on utilization rates and inventory trends, and some of your competitors have talked about prices returning to historic norms. If this happens, will you still be able to get your gross margin back to its previous peak?
AND: Sure, I’ll take this one. From a gross margin and utilization standpoint, we talked a little bit about this on the Q1 call, we expect utilization and gross margin to be at its lowest in the second quarter. However, we expect the gross margin growth rate to be moderate in the second half of the year. Specifically, in the third quarter, we anticipate a gross margin of just over 67%. Viewed from here, gross margin growth will be dictated by continued revenue growth, a mix of business and utilization. From a balance sheet perspective, since the peak in the third quarter, we have reduced our balance sheet inventory significantly, including over $70 million in the second quarter. In the third quarter, we expect inventories to be reduced again by approximately a smaller amount than in the second quarter.

For a complete transcript of the earnings call, please see Full Earnings Call Transcript.