All right. Let's go ahead and get started. Greetings and Happy New Year, and thank you for attending JP Morgan's 21st annual CES Semiconductor Tech and Automotive Conference. My name is Harlan Sur, Semiconductor Capital Equipment Analyst for the firm. Very pleased to have Prashanth Mahendra-Rajah, Chief Financial Officer at Analog Devices, and Mike Lucarelli, Head of Investor Relations, here with us today. For those of you that don't know, the Analog Devices team, leadership position in mixed-signal and RF analog semiconductor, strong position in power management and strong position in signal chain processing, both analog and digital, which is the technology that bridges the physical world to the digital world and a key focus for the team. Best-in-class growth, operating free cash flow margins, and a very diversified business with industrial, automotive, and communications infrastructure segments re-representing around 85% of total revenues.
With that, gentlemen, thank you for for joining us this morning.
Thank you, Harlan. Great to be here.
I'm gonna start off with the first few questions, then we can open it up for the audience. You know, ADI's FY 2022, you know, revenues on a like-for-like basis, up 26% year-over-year. Your core B2B markets of automotive, industrial and communication infrastructure up 30%, better versus the industry data for the analog segment of the industry, which was up low 20% last year. As we look ahead into this year, the team is well-positioned to weather the weaker global macro demand trends given the high exposure to auto, industrial, and comm infrastructure, with very low exposure, 2%-3% exposure to the weakest segments of the market, namely consumer PCs and smartphones. The market has the company growing revenues up low single digits this fiscal year and better than our industry forecast.
help us rank order your market segments in terms of demand sustainability this year in the face of a weaker macro environment.
Yeah. Okay. Great. Thank you. Pleasure to be here, and thank you all for joining us, including those on the web. We had a pretty spectacular 2022. Harlan took you through the numbers. As we look forward to 2023, and as a reminder, our fiscal started on November first, so we'll be finishing our Q1 here in a couple of weeks. As we look forward to 2023, we feel very good about the current guidance we have in there for the Q1, and at this point, we still have considerable backlog that we are working through that give us confidence for the H1.
When I think about the end markets that we're most excited about, order activity for our industrial business continues to be the strongest of our end markets, particularly in industrial, we're excited about our healthcare business, our aerospace and defense, given the current geopolitical environment, our energy business, which has been seeing some pretty strong growth given what's going on with energy prices here and the technology we provide to help people manage that. As Harlan mentioned, our automotive business that grew, I think, almost 30% last year on a relatively flat SAR.
Mm-hmm.
Again, we've much of that is content driven with our electric vehicle growth, as well as our infotainment and GMSL products that we picked up from Maxim. The auto in a flat SAR environment for 2023, if SAR remains flat, I'd expect auto to be up double digits as well. The perhaps the other one that we're a little optimistic on as well is our wireless comms. We are looking for 5G deployment to continue as planned in India. If 5G does deploy as scheduled in India, then we feel optimistic that we could see some year-over-year growth for our wireless business. For those of you here in person at CES, I encourage you to swing by our booth.
We have a pretty big display of our automotive technologies out there. I think we actually have an electric car there which has a couple hundred dollars of ADI content on it, so a good chance for you to see why we do so well in auto.
Last earnings call. In summary then, it sounds like you feel very confident on the growth prospects for industrial, for automotive, and maybe a little bit in the wireless comms side of the business. Last earnings call, you know, the team mentioned that bookings stabilized middle of the October quarter and into the January quarter, and in particular, order trends continued to remain strong in auto and industrial end markets. Have you seen order trends continue to remain relatively stable? You did mention Asia, China weakness last earnings. I mean, have you seen any demand changes by geography?
Yeah. Yeah. Thanks. Thanks, Harlan. I guess a couple things that we can, we can update on today that, you know, versus... Maybe I'll start by just doing a quick recap of what we saw in 2022-
Yeah.
-to give context. In the H1 of 2022, we saw extraordinarily strong orders, and as a result of those very strong orders, we saw backlog build to levels that we really haven't seen in the company, where our backlog exceeded our ability to ship, by several quarters. We were looking at backlog that went out more than a year. In the third quarter, we started seeing that order rate begin to decline at a more, at a meaningful rate. In the fourth quarter, we saw that begin to stabilize. Now, over that same period, the team has been working very aggressively with our customers to review what they have on order from us and where appropriate, clean some of that backlog-
Mm.
-out so that we can get a true signal of what is demand, what do they need in the current quarters, versus what they are in line for because lead time for so high. The order activity, particularly in industrial, has been relatively stable on a growth basis. The cancellation activity, again, which was driven by ADI as an effort for us to clean up that backlog, has been progressing. As a result, I would expect our Q1 book-to-bill ratio to probably be below 1. That's a good thing for us-
Yeah.
We are trying to look at how do we bring that backlog inside of 52 weeks. Again, for those of you who have followed us, you know that typically our backlog would only cover about nine to 10 weeks. We are, we're well ahead of what we would normally be, and we need to bring that down to kinda get our demand and our supply aligned. Good progress from the sales team on working with customers for cancellations, and I think that's probably the update for today.
Perfect. In terms of cancellations and pushouts and/or lead times, have they changed in a meaningful fashion?
Lead times are improving. Lead times are definitely improving, but they are very node specific. It's, it's dependent on the manufacturing process. We, we like lead times to be, in general, six to eight weeks. On average, today, again, that's a, that's a very broad average 'cause there's a wide distribution, but on average, we're still measuring them in months.
Mm-hmm.
More work to do. I would expect that it'll be another quarter to at least before we start to get lead times back to where they need to be. One of the key steps to improving lead times is clearly, getting the backlog down to more, to more reasonable levels.
Got it. Is the way to interpret the book-to-bill less than one, is that more a function of overall new bookings being relatively stable, and that's being offset by sort of your team sort of flushing through the current book of business and just making sure that customers are, you know, gonna take what they previously ordered?
largely, yes. Let me say it a little bit differently. That we think of orders on a gross basis.
Yeah.
We offset that with cancellations.
Yes. Yes.
-that happened in the quarters. Orders on a gross basis in industrial continue to be the strong point.
Uh-huh.
Our other markets not quite as strong. Cancellations are spread across all markets, all end markets. On top of that, I think what we're also just beginning to see a bit more of now and we'll be mindful of this over the coming weeks and share more in the earnings call is, as China has reopened and relaxed some of its COVID-19 restrictions.
Mm-hmm
we're certainly seeing a higher level of disruption in China, that is being driven by employment limitations. Where what our teams are telling us is that there's a great deal of disruption going on now as COVID-19 is spreading, the fear of COVID-19, given the relaxation. It'll probably be a choppy couple of weeks till everyone gets on the other side of Chinese New Year to see where that settles out. The same group feels very optimistic about the recovery after that.
Yeah.
The business is well poised for growth. We just need folks back to work, across China to start driving that.
Sounds like automotive is incrementally weaker relative to, I think, your prior views. What are the dynamics shaping the more recent view?
Harlan, I would say that investors need to be watching the production numbers.
Yeah.
What is SAAR going to do?
Yeah.
I feel very confident that we will outperform SAAR at a meaningful rate. There's no risk to the secular drivers that are behind our growth there. As I mentioned, you can get a good flavor of that if you swing by the booth today at CES. What is unknown to us is how is that production going to roll out. Clearly, the growth in electric vehicles is not as strong as it is, but it is still clearly growing.
Mm-hmm.
-than ICE.
Right. Okay. That goes back to your prior view, which is if SAAR is flattish this year, team's gonna grow their automotive franchise.
Correct.
Many semiconductor companies are struggling with excess inventory work downs, especially in consumer focused markets. Obviously, you guys have low exposure there. In core auto and industrial, you know, the inventory dynamics appear to be different. For ADI, we think that high performance analog is one of the golden screw components. Customers probably have not been able to accumulate much in the way of excess inventories of your products. Do you agree with that? Do you hear that from your customers that, yeah, high performance analog, power management, I mean, these are the products that are tougher to get?
I don't know that I can comment specifically to the golden screw, but I would add maybe some additional context. For our automotive business, and we've talked about this in prior quarters. For our automotive business, when we look at the growth we saw in 2022, where we grew 30% or so above the market or car production, we've been able to do a very detailed and thorough analysis to identify roughly 25% of that growth to come from a couple core items. Namely, the growth in electric vehicles and our BMS products sales as a result of that, given our very high share there.
The growth in our A2B franchise, which were design-wins that we had won in prior years, and just given the cycle time of those going from design-win into production. We can see that clear growth. The growth in GMSL, which is Maxim's data- link product that helps connect cameras, radars, LiDAR, et cetera, within the vehicle. Of course, some pricing action that we took. We're able to explain the overwhelming majority of our outperformance as not being inventory related. There's a little bit in there, as I mentioned, call it, you know, 5%- 6% that could be inventory. As we also know, and I'm sure investors do, there's been a growth in more premium models on a comparable basis, kind of pre-COVID-19.
That could also account for some of that unexplained growth. Worst case, it is a little bit of inventory building, but we know that it's relatively modest. We feel good about our auto inventory, and then that's validated by our ability to look through to those customers where we have inventory on consignment, and we can see that consignment inventories are not elevated.
You know, distribution or channel inventories, which is a big part of your customer mix. You know, it's been below your seven to eight-week target range over two years now. You know, do you expect to keep channel inventories at low levels in this period of uncertainty? Just kind of keep things tight there?
In channel inventory, let's talk about the benefit that our distribution partners provide us. It is coverage. What is important for us is to build channel inventory with high dispersion of SKUs versus high quantity of fewer SKUs. That is the. When we are not growing channel inventory, it is because of our desire to make sure that we have breadth of coverage versus, you know, having a distributor have 100 units of one part versus one unit of 100 parts. That is the, that's the value they provide to us. We will get channel inventories back to a healthy level. It's gonna take us probably a couple more quarters because that is dependent on our production plans.
Mm-hmm.
You know, building through the variety of products that we have. As a reminder for investors, we have about 75,000 different SKUs. It takes a lot of production planning to be able to run through all of those SKUs.
Let's talk about the design win pipeline. Of course, before I go on to design win pipeline revenue synergies and end markets, anybody have any questions? You know, on revenue synergies, the team noted that design win pipeline is beginning to benefit from cross-selling of the Maxim portfolio. You're on track to achieve target $1 billion in revenue synergies, you know, over the next few years. In particular, the team had highlighted three areas of revenue synergies: automotive GMSL, industrial process control, and then just broader sort of power management and power market synergies, right? What is the team seeing? Where is the team seeing the most traction? Could you provide some color on how the team is leveraging its customer relationships and your anchor product positions with your core high-performance analog products to pull through the breadth of the portfolio?
Sure. Maybe some definitions first to help people understand some of the terminology that we use. At ADI, when we manage the opportunities that we have for us to grow the revenue, we use a relatively rigorous data-driven model that captures the sales as it goes from an opportunity, which is where sales has identified, hey, here is a opportunity for us to bid on a specific product for a customer's need. If we win that selection, it goes from an opportunity to a design-in. Not all opportunities go to design-in. A customer may choose not to use us at that point, or the product may not go for-- the project may not go forward. From design-in, the next phase is design-win. Design-win.
Mm-hmm.
Is where the product has begun to ship to that customer. Again, what's the transition from design-in to design-win is we may be working with one assembler or one person in the supply chain, but a customer's end solution may use a different outcome. It may not be the partner that we've been working with, it may not be that their choice goes forward. In otherwise, a design-in will become a design-win, and then it'll start ramping to peak revenue. We track each of those individual phases. That's a process that ADI has used for years.
I will say that as we've acquired companies over time, it is a process that seems to be unique to us, certainly with the rigor that we have on it, because neither Maxim nor Hittite nor Linear had this level of focus and granularity in tracking the projects as they move through these various stages. When we look at our design-in activity for 2022, that means opportunities that we won and went and where have gone to a design-in. In 2022, the dollar value of that is up over 10%. Over 10%. Thanks, Mike. Over 10% versus 2021.
That's a great indicator for us that our plans to kind of grow this business at a 7%-10% model is on track because we're one year in, and we're seeing that strong 10% on a design-in leading indicator. I would also say that when we gave you our cost synergy numbers, we probably had a little bit of hedge in there, but as we've talked about, we've greatly exceeded the cost synergies that we expected from Maxim. What we learned in that process is that scale matters, and we found that we were able to really extract a lot more value from the Maxim deal than we had originally intended. We feel a similar level of optimism.
Mm.
On the revenue synergies. Having learned what we did from Linear and using that same kind of tools that we have and knowing how to make this success, we, I would say that the internal view, on our ability to deliver revenue synergies with Maxim are probably higher than they were when we did Investor Day, which was in April . That's nine months ago.
Perfect. Let's move on to the automotive segment. G iven that this is CES, automotive is obviously always a big focus. In FY 2022. This is including Maxim. Like for like your auto business grew like 31% year-over-year relative to auto production, right? Of high single digits type of growth. The team has talked about, you know, the growth areas within auto of BMS, GMSL, A2B, functional safety. You know, this represents over $1 billion of your automotive revenue or 40% of your sales. Can you talk about how much this segment grew in FY 2022 and, you know, whether the team can sustain its 20% plus targeted growth CAGR, you know, should auto SAAR remain flattish or even decline?
Yes. I think that comes back to the what is the assumptions that you have on automotive production.
Yeah.
Right? What can I say, with respect to those key growth drivers. On the A2B platform, it is essentially the standard now. Almost every-
Yeah
... OE is using A2B, but it is only about halfway through its deployment. Again, thinking of those different phases, over pretty much everyone has designed it in, but we haven't hit design-win for all of them. I think only half of them, Mike?
Yeah.
About half of them are actually shipping, there's still significant growth as they move from design-in to design-win and begin shipping. We feel great about A2B. The value on that is so compelling in terms of the economic value that we're delivering to our customers on that. On GMSL, we have really taken advantage of what Harlan referred to as the cross-selling benefits. Where did Maxim have particular strengths with a customer? Where did ADI have strength with a customer and be able to use the strength that we have with those customers to bring GMSL in?
The design-in on GMSL is giving us great optimism for one of the reasons why we feel even better about the revenue synergies coming from Maxim. For BMS, I think people know that we are the market share leader by quite a bit. I think we have been public, if not, I will be public now, that in 2022, we won eight.
Yes.
We won eight, we lost one , the sales team is telling us that that customer is coming back around to... It may not be a loss for us right now, but of those eight that we won, two were Wireless BMS. Again, Wireless BMS is a place that we really don't have competition on.
Mm-hmm.
It's a tremendous franchise for us. For customers who are in the room, we do have a display at CES for our next gen BMS. It's not accessible to the general public, but on an invite-only basis, you can go into the back room, and you can see some pretty amazing things that we're working on for next gen BMS.
I think you guys have talked about a BMS pipeline of around $4 billion. How big is the BMS business today, and how should we think about the growth into that $4 billion opportunity over the next few years?
Mike, you wanna take the sizing?
Yeah, sure. If you look at currently, we exit the year at a run rate on an annual basis of over $500 million for BMS.
Wow. It's increased a lot. It's the share, it's content. In front of us, we have, as Prashant mentioned, we're winning more than we're losing by a lot and wireless BMS will also start ramping. That $4 billion pipelines, think about that as kind of over the next five to ten years. No reason to think this isn't a multi-billion dollar business for ADI.
You won eight. On Prashanth's comment, you guys won eight on BMS, is that cumulative, or is that just FY20 22?
That was just 2022.
Can you guys give us a cumulative number roughly on how many BMS wins you guys have? Just curious.
I do not know it. I can tell you we won a lot, and we'll keep winning more. At the Investor Day, we talked about we ship into 16 of the top 20 OEMs.
Mm.
Our share is probably in BMS by 70% plus. We're a market leader, and we're continuing to win at least that much share. We are looking at some different analysis to To your point, Harlan, if you look at all the EV models coming to market this year-
Yes
... we'll likely kind of share in the future how many of those are ADI. To give you confidence that we're a leader-
Yeah
We sustain that position and expanding it as well.
Great. Good to see the strong revenue traction exiting last year. Industrial. Your industrial business has, you know, performed very strongly. Again, like for like, you know, the team ended fiscal 2022 with that business up 29%, well above your targeted high single digits CAGR. You know, help us understand what drove the outperformance and entering this year with, you know, GDP set to decelerate, you know, 1%-2% growth this year, below trend line. I mean, how should we think about the sustainability of the industrial business?
Yeah. The industrial business is again, this is a content story that there is, it's a lot more challenging for folks to internalize as compared to automotive, but it's a very similar trend. The role of semiconductors and the role of Analog Devices, particularly with our industrial customers, continues to grow. As they continue to do their next generation of products, we end up with more content versus their prior generation. It takes a longer cycle because they don't refresh at the same rate of automotive companies, but it is a long-term trend for us. You can see it in. We are on our seventh year, I believe, of double-digit growth in healthcare.
Our aerospace and defense business, we have probably the best visibility on and will be very surprised, you know, barring some major change in DoD budget in the next couple of years, I'd be very surprised if we don't see continued healthy growth from our defense business for another three to years, really. We have enough visibility out to see that there's just tremendous content and programmatic wins that are gonna continue to ride out there.
Then for the other parts of the business, factory automation, again, is a great story for us, and I think folks are hearing more about companies diversifying their supply chain and onshoring their supply chain, and the way that to make those domestic manufacturing operations more cost-efficient is through automation. Then instrumentation and test again continues to be a key driver. Great share position for us. We have dominant share among majority of those players, where performance matters and you need ADI's technology to be able to measure precisely and measure with speed.
Yeah. I'm pretty sure this is the case. Relative to your Analog peers, the biggest differentiators in your industrial business are medical and healthcare and aerospace and defense. That's where I feel like your revenue mix is much higher-
I-
relative to your peers.
I would add to that having a portfolio-
Mm.
that has mixed-signal RF and power.
Yeah.
The ability to provide a more holistic solution to our customers because we have that full spectrum it makes a difference as well.
Yeah. To your point, right, You leverage that portfolio across things like medical imaging, instrumentation, monitoring. This is in healthcare. These trends are all expected to be extremely strong over the next few years, certainly even this year too. I'm sorry if you mentioned this, but is the medical and healthcare business already driving a $1 billion annualized run rate? Sort of given the bookings and backlog trends, you know, what is the outlook for digital, your digital healthcare franchise for this year?
Yeah. Digital healthcare now, which we have, which we broadly call our medical business, is now what percentage, Mike, of total? It's 15% of total ADI revenue. On a $12 billion revenue base, 15%. It's a great business for us.
It's 15% of industrial. 7% or 8%...
Oh, sorry.
-of total ADI. It's about, call it $900 million. To Harlan's question, the run rate exit in the year is probably $1 billion plus.
Yeah. Strong growth there. Comm data center. You know, communications business grew 27% last fiscal year. 5G base station deployments are forecasted to grow this year, you know, led by India. Cloud CapEx spending is forecasted to decelerate but still grow 8%-10%, right, led by accelerating compute initiatives, artificial intelligence. Given that these are very strategic programs in general, like, what's the team's visibility to the deployment activity and confidence on, you know, the outlook in 2023?
I mentioned this in an earlier point that our 2023 outlook for wireless comms is really tied.
Yeah.
to does India deploy 5G?
Mm.
As you know, prior years was driven by tremendous deployment in China. 2023 is tied to India, and it doesn't matter which of the three big infrastructure companies gets share in that deployment. We're well-represented on all of them. In 2024 and 2025, we would look for that to be the year that Europe starts to spend money. As for those of you who've traveled in from Europe or who travel to Europe, you probably recognize that there's still many pockets of Europe where you're down to 3G speed. It is a necessary upgrade that needs to happen in Europe. As long as that, as long as that capital is spent, then it's gonna flow to us given our dominant share in providing 5G technology.
On the financials, on cost synergies, you realized $350 million of the $400 million of phase two cost synergies, so still have $50 million to go. Beyond the $400 million of cost synergies, the team has other longer term cost-saving initiatives, right? Like you're adding ADI production into Maxim's Beaverton fab or bringing some of Maxim's outsourced wafers internally. At the Analyst Day, you noted plans to increase internal capacity by 2.0x. Where do you stand on these initiatives, and how should we think about the margin implications, you know, as these initiatives begin to be put into place?
Sure. Thank you. Yes. I guess what I would ask, and we've said this before, is we're asking our investors to really measure us on our operating margin. Give us the flexibility to make those trade-offs...
Yeah.
That we need to be able to drive revenue growth and deliver to you a strong operating margin and then convert that into free cash flow. Our op margins today, as you know, are in the mid-70s%. There certainly are ways that could grow, but we would rather trade some of that margin growth for incremental revenue growth where it matters. Our focus is be able to deliver you a company that's generating high single-digit revenue growth with very, very strong op margins, kind of in the high 40%- 50%, and then convert that to free cash flow and return all that cash to you. It's a, it's really a cash flow model that we would ask you to model versus trying to put us into the high 70s% on gross margin.
Yep. No, absolutely. On that note, you know, at your last Analyst Day, you laid out a path to $15 of earnings power by fiscal 2027. As you mentioned, high single digits, you know, revenue growth, very strong operating margins at the upper end hitting 50%. This is the question I often get asked from investors is did the analog team, you know, factor in, you know, potential macro slowdown through this modeling period? Given your design-win pipeline, your confidence on achieving the financial targets?
Sure. Sure. I'll take the first part of that, which is that we have very high conviction on that $15 of EPS. Now, what we are less clear about is what are the market multiples that get applied in the future. I don't know if we return to what we saw in prior years, just given, where interest rates are. From an EPS standpoint, we have very high conviction on $15 of EPS. In terms of what was factored into the model, I'm gonna ask our modeler who's sitting next to me here.
Yes. Harlan, that's a good question. We did. We factored it in a year of decline. There, we did think that there'd be a year of decline in that long-term 7%-10% model. You know, we also assumed it would bounce back the year after. Like your typical semi cycle, you have a down year...
Yeah.
Up year after that. We factor that in to get to the long-term revenue growth rate and to the $15 of EPS. I think we're kinda cheap at for $15 EPS and a $150 stock, that's 10.0x. I think it's a good buy.
Yeah. Well, we're just about out of time. Appreciate the, appreciate the insights and, looking forward to monitoring the progress and execution of the team this year. Thank you very much.
Great. Thank you all. Happy New Year.