ADI

Analog Devices, Inc. (ADI)

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Analog Devices Inc. (ADI)

Barclays Global Technology, Media and Telecommunications Conference

May 23, 2013 1:10 pm ET

Executives

David A. Zinsner - Chief Financial Officer and Vice President of Finance

Analysts

Blayne Curtis - Barclays Capital, Research Division

Presentation

Blayne Curtis - Barclays Capital, Research Division

All right. We'll go ahead and get started. My name is Blayne Curtis. I'm the analyst here at Barclays. Very happy to have with me Analog Devices. From the company, Dave Zinsner, VP of Finance and Chief Financial Officer; as well as, Ali Husain, who many of you know from Investor Relations.

Question-and-Answer Session

Blayne Curtis - Barclays Capital, Research Division

So just to jump right in things, I mean, you just reported earnings 2 days ago, so maybe, Dave, it will be helpful to just kind of recap that a bit. The April quarter was essentially in line. The guidance was a bit muted, still seeing Analog growth. The rest of it, it is fairly flat. So maybe that would be a good entry. I think most of them know your business but maybe just step through kind of, just what do you think from the end market in the near-term here?

David A. Zinsner

Yes, okay. So last term -- wish I don't hit this mic. Last quarter was a pretty good quarter. It came in pretty much as expected. We thought we'd be somewhere between kind of 4% and 8% off then we finished kind of rate. We split the goal close and came in 6% up. Good strength in the industrial space, which is usually what happens in our second quarter, and good -- I think good progress on gross margins. We improved gross margins, improved operating margins back into the 30% range. So everything looked pretty good. We also did take inventory down, which if you go back to last year this time, there was kind of similar trajectory. One thing we did was we built inventory last year. This time -- this year, we decided to actually keep inventory relatively lean and as things pick up, we'll get the leverage when that happens. This quarter, I would say bookings in general, over the quarter, were very solid. But certainly, strengthened through the quarter and exited the quarter with very strong bookings. They were -- both our bookings as we measure it on us, which is basically our OEMs plus what the distributors order. And the orders, if you combine OEM and what the -- and customers order on distributors of our parts, both of those were up double digits. So that -- those are all good positive signs indicating some momentum. So as we kind of thought about our guidance, we thought given all those things and particularly we saw strength in industrial, we felt like there's a reasonable opportunity yet towards the higher end of the range we gave, which was kind of, we gave essentially flat to up 4%. So we thought that, that's as a reasonable scenario, which would indicate we'd be kind of closer to the top in the range. I think as we thought about the bottom end of the range, what kind of entered our mind was last year. Everything felt almost exactly the same last year and we worked hard a bit off-guard as things really started to slow down particularly in July. And we certainly get industrial data points but the thing that we really hang our guidance on is really bookings and how bookings are transpiring. And the difficulty we have is, we have very short lead times and so right now, customers are booking mainly for deliveries in June not into July. In July, it becomes this kind of like unknown entity out there that where we're not really sure how things are going to go. So we thought well if a scenario transpire, which is momentum continues and at some point in anticipation of summer shutdowns or what have you, July really weakens. We ought to have that as that be our kind of our downside scenario and that's what kind of led us into this kind of flattish on the downside. At this point, there's not any evidence to suggest that, that's going to happen but out of abundance precaution more than anything, that was why we gave that kind of range.

Blayne Curtis - Barclays Capital, Research Division

It is a clearly the data if you look at your guidance up almost 2%. And if you look back historical trends, it does seem more seasonal than not, or more normal than not, and I guess when you look at the remainder of the year, seasonality industrial is weaker in Q4 and better in the first half. The big debate is this year, normal or is this the new level or are we seeing something different this year? And I mean, do you have any indications that other end markets, and I think that most of you will get to networking but I think if you're hopeful. What will make this different than last?

David A. Zinsner

Well I think if you guide -- under our guide where the midpoint is kind of up 2%, that I think you're right. That is kind of normal seasonality although quite honestly, that's an average of 5 years of things going really gangbusters or not or going into the toilet. So there's been only I think one year where we actually did do up 2%. I think that was last year. So I think on the industrial side, we -- assuming that the macro doesn't fall apart on us. I think we have a pretty good deal that there's some momentum. Having said that, I wouldn't call it kind of a recovery momentum. I'd call it, our customers are being very cautious but demand is picking up modestly and so they're ordering very modestly, it's that kind of scenario for industrial. Hopefully, at some point, we get kind of a real robustness. People start spending capital for factories and buy industrial equipment and so forth. And those things really start to kind of pull the industrial business up and that would be the kind of the characteristics of a real recovery. On the comp side, as you point out, we guided flat communications and although we kind of hang out a little carried, which was orders in the last couple of weeks for comps did tick up. And I think trying to take 2 weeks and extrapolate that out and say, Okay, that things are back to the rate they probably -- we've done that many times internally and that usually ends up being a disaster. I think at this point now there's limited to no visibility as to how carriers are going to deploy equipment and what's going to happen to our OEMs and thus what's going to happen to us, in terms of deliveries and comp space. But I think that's still pretty much a wait-and-see game for us and at this point, there's no indications that it's going to do anything but be flat in the third quarter. Consumer, we thought would be flat as well but that business is generally kind of flattish in the third quarter. I also would expect, hopefully, that seasonality will play in the fourth quarter and that business starts to recover. But with that again, we don't have any orders or any firm indications that, that's going to happen but that's the going planning assumption at this point. And then on the auto space, which had a great quarter this quarter, in fact, it exceeded our expectations and was at a level now where it's pretty much as high or are we right in close to a tie? That business, we thought would be flat. Normally, it's seasonalities in auto is okay but it starts to fall off a little bit in our fiscal third quarter and then it starts to recover in the fourth quarter. Yes that one could surprise us again. It's kind of hard to tell. And there's certain -- we pull all these like little data points out. What the U.S. automakers are going to do in terms of shutdowns. Seems like they're not going to do as much shutdown activity, if any, through the summer. That could be positive. We think their inventory is in relatively good condition. We're designed, or rather our registrations are up in certain countries and in Europe. So there might be some opportunity there to start to see some growth. I think fundamentally though that business has a dollar content story that's been going on. It's been growing double digits for 5 years. So I would assume that even if the end unit volumes of autos is not that robust, there might be some bouncing around depending on the quarter but I think in general that business is going to grow quite well because of the dollar content.

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