The operator introduces the Analog Devices' First Quarter Fiscal Year 2024 Earnings Conference Call and introduces the host, Michael Lucarelli. The call will include forward-looking statements and non-GAAP measures. The CEO and Chair, Vincent Roche, welcomes the new CFO, Richard Puccio, to the call.

The company's new CFO brings valuable financial experience to the table and the company's first quarter results were above expectations. The inventory rationalization trend among customers is expected to continue in the second quarter but bookings have improved, giving confidence for a recovery. The company's strong balance sheet and operational agility are helping them navigate the challenging macro situation. The company has also made investments in R&D and customer engagement while maintaining profitability and announced a 7% dividend increase. The company's investment philosophy focuses on anticipating customers' future needs in a software-defined, AI-driven world. Customers are facing technological complexity and the need for secure and power-efficient solutions.

ADI has strategically allocated their capital to increase their engineering capabilities and better understand their customers' challenges. This has allowed them to deliver stronger innovation and secure partnerships with companies like Honeywell. In the automotive sector, ADI is focused on electrification, advanced safety systems, and immersive digital experiences.

ADI's GMSL Solution is gaining popularity in the automotive industry, with a recent increase in share at a top global auto manufacturer. In the datacenter market, their high-performance power and protection solutions are helping customers improve power delivery and system performance, resulting in a significant design win from a large hyperscale customer. In healthcare, ADI has received FDA clearance for a non-invasive remote monitoring platform for chronic diseases, which adds a new growth opportunity worth $5 billion. The company is also making progress in manufacturing resilience, which is a growing priority for customers.

The company has invested record levels of CapEx to expand capacity and enhance resiliency. They plan to double front and back-end internal capacity by 2025 and reduce capital spending. A portion of their investments have been focused on implementing more efficient systems for sustainability benefits. They have also extended their foundry partnership to secure additional technology capacity. These investments will enable a more flexible manufacturing model and increase swing capacity. The company is confident in their steps to preserve capital and navigate near-term challenges while also investing in future competitiveness. The new CFO, Richard Puccio, is excited to join the company and help navigate the current challenges while preparing for future opportunities.

In the first quarter, the company's revenue was slightly above their expected outlook, but still down compared to the previous quarter and year. Industrial, automotive, communications, and consumer sectors all experienced declines in revenue, with only automotive showing growth. Gross margin and operating expenses also decreased, resulting in an operating margin near the high end of the outlook. Cash and equivalents increased, net leverage ratio remained low, and inventory decreased.

In the first quarter, channel inventory decreased and cash flow remained strong. Over the past 12 months, the company has returned a significant amount of cash to shareholders through dividends and share repurchases. For the second quarter, revenue is expected to be $2.1 billion with a decline in all end markets. Operating margin is expected to be 37% and EPS is expected to be $1.26.

The speaker explains that the actions taken to protect profitability and the natural shock absorbers within ADI have allowed them to maintain strong profitability despite a significant decrease in quarterly revenue. They express confidence in their financial profile and technology and will continue to invest in their future regardless of the current cycle. During the Q&A session, the first question asks about the severe downturn in revenue, which the speaker attributes to the unique and widespread impact of the events that caused the supply chain fracture. This event affected every segment, customer, and business, making it the broadest demand inflection they have ever experienced.

The speaker discusses the recent supply chain issues and resulting shortages in the industrial market. They predict that it will take four to five quarters for the market to correct and return to growth. However, the company has been able to get ahead of the supply chain issues and expects to see a return to growth in the second half of their fiscal year. The speaker also mentions that industrial is the weakest segment and expects a double-digit decline in all segments next quarter.

The speaker says that there has been a 20% sequential decrease in comms, auto, and consumer sectors, with a larger impact on the industrial sector due to inventory reduction in the channel. This downturn is mainly due to a supply-driven demand correction, with some pockets of weakness in demand. The lead times have normalized, causing customers to reduce their inventory to match the shorter lead times. Overall, it is more of a supply than demand correction in the business.

In the paragraph, Vincent Roche discusses the company's outlook for the second half of FY24. He mentions that the first half will be focused on inventory digestion and that the second half is expected to see a return to growth. He also mentions that the company's bookings are improving and that the macroeconomic outlook is more bullish than it was in the previous quarter. The question of which end markets are showing the best recovery in bookings is raised, and Roche states that as demand and utilizations improve, everything will improve, including gross margins.

The company has been working hard to ensure that they have enough supply to meet the increasing demand. Bookings have improved across all segments, with aerospace and defense and healthcare performing the best. However, the wireless business is an exception. The gross margin outlook for the second quarter is slightly lower than expected due to weaker revenue and inventory reduction, but the shape of the revenue recovery will ultimately determine the gross margin trajectory in the second half of the year.

The company expects gross margin to improve in the second half of the year due to declining inventory levels and utilization rates. The outlook for the third quarter is uncertain, but historically, B2B markets have remained flat while consumer markets have seen a mid- to high-single-digit increase. Bookings have also increased in the past two quarters, indicating a potential pickup in the second half of the year. In fiscal year 2023, China accounted for 18% of total revenues and was the worst-performing region, but it is unclear if orders are growing sequentially in this region.

In response to a question about cancellations and potential pickup in the China region, Michael Lucarelli states that whole regions, including North America, Europe, and China, are weak. China has been the weakest for the longest time, but the rest of Asia is also struggling. Vince adds that bookings are improving globally and in China, with no impact from Chinese New Year. In response to another question, Vince mentions that sell-in is tracking 15-20% below sell-through, but this is related to channel inventory. The company has reduced channel inventory by $50 million per quarter for the past two quarters, and this quarter's guidance includes a bigger reduction.

The company is expecting around $100 million in the channel side and is reducing its inventory. The back half of the year is expected to have better sell-in and sell-through due to actions taken in the last three quarters. On the customer side, the company is closely monitoring inventory levels and believes the worst of the inventory correction is over. The company is confident in its inventory position and expects a more normalized growth pattern in the second half. The company's new vertical capabilities may lead to closer partnerships with customers or potential competition, but they are prepared for an upsurge.

The speaker addresses concerns about verticalization and competition with customers, explaining that their business has become more solutions-oriented and they continue to build on their core component franchise. They mention a recent product release in the healthcare space and discuss the importance of defining the line between their core value and their customers' core value. They also mention the growing trend of incorporating AI into their solutions.

William Stein asks about the potential impact of Generative AI on Analog design engineering capabilities at ADI. Vincent Roche responds by stating that ADI is already using AI in their tool chains, products, and business processes. He believes that AI can automate routine tasks, but at the high-end performance spectrum where ADI operates, the company's intellectual property and learning system will continue to be valuable. ADI sees AI as an opportunity and is incorporating it into their product development and customer support processes.

In this paragraph, Timothy Arcuri from UBS asks a question about period costs and underutilization charges. Michael Lucarelli responds by stating that the decline in gross margins is due to a combination of mix and utilization, but the outlook for the back half of the year looks promising with the industrial sector bottoming out and expected increase in starts. There are no inventory charges affecting gross margins, but there have been elevated inventory reserves in the past few quarters. This is the last question of the session.

In the last question of the conference call, C.J. Muse from Cantor Fitzgerald asks about the performance of the automotive segment. Michael Lucarelli and Vincent Roche explain that while there is an inventory correction going on, the growth drivers in areas such as BMS and GMSL AB are offsetting it. They also mention that the Tier 1 side or OEM side is experiencing some inventory digestion, but they are confident in the growth of these areas for the rest of the year. They conclude by saying that they expect automotive to be their best performing end market in the second quarter and for the full year. The operator then thanks everyone for joining the call and announces that a transcript will be available on the website. The call ends.

This summary was generated with AI and may contain some inaccuracies.