The operator introduces the Analog Devices' Second Quarter Fiscal Year 2024 Earnings Conference Call and introduces the host, Michael Lucarelli. The CEO and CFO of ADI are also present on the call. The information discussed will include forward-looking statements and will be on a non-GAAP basis. Revenue, adjusted gross margin, operating and non-operating expenses, operating margin, tax rate, EPS and free cash flow will be discussed. The CEO, Vincent Roche, thanks everyone for joining and highlights the strong execution and financial performance in the second quarter.

The company believes that the worst of the economic downturn has passed and they are seeing improvements in their core business. They remain cautious due to ongoing uncertainty but are managing their short-term goals while focusing on long-term strategic priorities. They provide examples of their success in the healthcare and industrial automation markets, and anticipate a strong revenue stream from their leadership position in the automotive industry.

ADI's strong performance is driven by the increasing content per vehicle, particularly in advanced safety and electrification. They have expanded their engagements with top OEMs and increased share in key areas such as functionally safe power and battery management systems. The company is also investing in AI technology, using it in their products and operations to better meet customer needs and maintain their industry leadership. This includes using AI to accelerate engineering development, improve manufacturing efficiency, and enhance the customer experience.

The company is focused on product portfolio innovations to take advantage of AI's potential, with the first wave of infrastructure investments already underway. They are leveraging their expertise in vertical power technology and heterogeneous integration to create more efficient solutions for hyperscalers. In addition, they are also seeing growth in the wireline market as customers upgrade to higher speed optical modules. The company's high precision controller has been designed into a 1.6 terabit optical module for a high performance compute leader. In the industrial sector, there is a growing demand for high bandwidth memory and high performance compute, leading to growth in the company's instrumentation and test business. They are working with key players globally to improve digital scan speeds, channel density, and energy efficiency for AI systems.

ADI's high performance compute and memory test sectors are expected to see record revenues due to the increased amount of ADI content in these systems. The company's goal is to bring application-specific AI models and high performance compute to the physical edge, resulting in improved latency, power efficiency, security, and cost. ADI is working on various projects, such as acoustic systems and 5G radios, where they are combining their expertise with AI to enhance their offerings. They are also using AI in their power management platform to address challenges and reduce complexity for power engineers. ADI has a strong presence at the physical edge, where important real data is generated.

In the second quarter, ADI's multimodal AI technology and diverse sensor types drove demand and accelerated growth for their signal chain and power portfolios. Despite a downturn in the semiconductor industry, ADI's team executed well and the company is well-positioned for the future. Second quarter revenue of $2.16 billion was down 34% year-over-year, with industrial, automotive, communications, and consumer applications all impacted by inventory digestion. Gross margin was 66.7%, down from the previous quarter and year due to mix, lower revenue, and reduced inventory.

In the second quarter, the company saw a decrease in operating expenses and a strong operating margin. They also have a solid financial position with $2.3 billion in cash and short-term investments. The company reduced channel inventory and expects to continue reducing CapEx in the future. They have generated $3.1 billion in free cash flow and have returned 110% of it to shareholders. For the third quarter, revenue is expected to be $2.27 billion, with sell through expected to be higher than sell in.

The company expects all B2B markets to grow in the coming quarter, with industrial showing the fastest growth. The operating margin is expected to be 40% plus or minus 100 basis points, and the tax rate is expected to be between 11% and 13%. Adjusted EPS is expected to be $1.50 plus or minus $0.10. The company believes they are at the beginning of a cyclical recovery, evidenced by increased bookings and a book-to-bill ratio above parity. They anticipate a balance of fiscal discipline, smart risk-taking, and strong execution will drive outstanding value for stakeholders. In the Q&A session, the first question was about the outlook for Q3, specifically in the Industrial sector. The company expects Industrial to be the strongest performer, with potential factors including end market demand, inventory replenishment, and specific sub-segments within the sector.

The speaker, Rich, discusses the industrial end market as the company's most diversified and profitable. He mentions that it has weathered an inventory correction and is expected to grow in the second half of the year. The company plans to reduce channel inventory in Q3, which will impact industrial the most. The company believes they are at the beginning of the industrial recovery, with positive prospects in aerospace and defense. The company expects all markets to grow in Q3, with consumer growing faster than industrial. The next question is about the book-to-bill ratio, which is currently above one.

The company's bookings have improved across all markets and geographies, with some applications in instrumentation, automation, and aerospace and defense seeing above one growth. The recovery in the second half of the year is expected to follow past cycles, with a strong upturn likely due to stronger PMIs in the industrial sector. The company believes that the bottom of the cycle has been reached.

The speaker discusses the difficulty in accurately determining end demand due to inventory fluctuations caused by the pandemic. They express confidence in the company's ability to capture upside growth and mention tailwinds from AI. However, they also acknowledge challenges such as high interest rates and inflation.

The speaker predicts a strong economic and geopolitical recovery, with good growth for the remainder of the year and strong growth in 2025. They are confident in their growth drivers and are selling more value to customers. They believe that semiconductors are in a good position due to increasing demand in the edge and cloud. They acknowledge that it is difficult to predict the near-term dynamics, but they are currently in a recovery phase. Another speaker adds that customer inventories are healthier and they have been under shipping for over a year. The company has reduced channel inventory and expects to continue doing so in the third quarter.

The company expects growth in the third quarter from normalization and increased sell through, which should lead to a more balanced fourth quarter. Gross margins are expected to bottom in the second quarter and to gradually improve in the second half of the year, driven by revenue growth, business mix, and utilization rates. The company has successfully reduced inventory in the second quarter and plans to continue reducing it in the third quarter while maintaining gross margin. This is possible due to the company's hybrid manufacturing model.

The company has been able to protect itself during the downturn by being flexible with capacity and maintaining utilization. Utilization is expected to increase as demand rises, leading to margin expansion. The goal is to reduce inventory in the channel and get back to the target range. The company's pricing has been stable and is expected to continue due to the stickiness of their products and focus on innovation. The company's ASPs are 4x the average, thanks to their innovation premium. The next question is about the bigger picture.

ADI has been selective in its M&A strategy, focusing on assets that get ahead of customers' needs. They have a strong analog franchise and have been adding more software and digital content. They have also been developing machine learning and neural networking capabilities. They are currently focused on capturing synergies from the Maxim acquisition and are always looking for new assets. Adjusted for a step function increase in pricing, their unit shipments are currently 25% below the long-term trend line, the lowest since the world financial crisis.

The industry is facing a potential supply shortage due to customers and the supply chain lowering inventories. However, ADI is well-equipped to handle a surge in demand due to their large inventory and internal capacity in their factories. They also have strong partnerships with companies like TSMC. This puts them in a good position to quickly respond to any sudden increase in orders.

The speaker discusses the company's good shape in terms of manufacturing agility and inventories. The next question, from Harlan Sur, focuses on the distribution business and the direct business, and whether the return to growth is driven by direct customer orders. The speaker, Michael Lucarelli, confirms that the growth is driven by real demand in the end market and that they expect to reduce inventory while growing. The last question, from Joseph Moore, discusses the company's improved margin profile, with operating margins expected to remain above 40%.

The company's through-cycle margin profile has been increasing over the past decade due to several factors. These include the resiliency of their manufacturing process, productivity improvements, and strong operational control over expenses. Additionally, the company's focus on innovation and capturing more value in their products has led to ASP increases and stable pricing. The company's diversity and long life cycles of their products also contribute to their strong margin performance.

The speaker, Joe, explains that their company, ADI, used to give away prices but they have stopped and now they are competing for sockets and innovation, which has contributed to their margin story. The call concludes with a thank you and information on where to find the transcript and reconciliations.

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