Analog Devices Inc
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Analog Devices Inc
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Good day, ladies and gentlemen, and welcome to the Maxim Integrated Second Quarter of Fiscal 2020 Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. [Operator Instructions] As a reminder, today's program is being recorded.
I would now like to introduce your host for today's program, Kathy Ta, Vice President, Investor Relations. Please go ahead, Kathy.
Thank you, Jonathan. Welcome everyone to Maxim Integrated's fiscal second quarter 2020 earnings conference call. Joining me on the call today are Chief Executive Officer, Tunç Doluca; and Chief Financial Officer, Brian White. As a part of our usual process, we have posted a supplemental financial presentation to our external investor relations website. The information in this presentation accompanies the financial disclosures in our earnings press release and on this conference call.
During today's conference call, we will be making some forward-looking statements. In light of the Private Securities Litigation Reform Act, I'd like to remind you that these statements must be considered in conjunction with the cautionary warnings that appear in our SEC filings. Investors are cautioned that all forward-looking statements in this call involve risks and uncertainty, and that future events may differ materially from the statements made. For additional information, please refer to the company's Securities and Exchange Commission filings which are posted on our website.
Now, I'll turn the call over to Tunç.
Thank you, Kathy. Good afternoon to all our participants. We appreciate you joining us today, and your interest in Maxim Integrated.
Let me first summarize last quarter's results and our outlook. Our December quarter results met our expectations while also maintaining lean inventory levels. Looking forward to the March quarter, we expect the return to revenue growth for the company from the same quarter last year driven by growth in communications and data center, industrial and automotive markets. We continue to be cautious given the persistent macro and trade uncertainty but demand is improving.
Let me provide some color by end-market starting with automotive. In the December quarter, our automotive business was up 5% sequentially with double-digit growth in our secular growth areas of BMS and driver assistance systems. Our revenue growth in our overall automotive business fared better than the growth of global car production. We see ample content growth opportunities for Maxim in ADAS applications in power management and point-to-point serial link data communication products. At Consumer Electronics Show, we held a large number of customer discussions on our BMS, driver assistance and power management solutions. Our latest generation automotive signaling products transport video, audio and data at 12 gigabytes per second. In recent quarters, we grew our serial link business from Chinese OEM customers.
At CES, we showcased our wireless BMS technology and new families of high-voltage automotive power solutions that efficiently control and supervise the hundreds of watts of power required for advanced driver assistance systems. In the March quarter, automotive is expected to be strongly up sequentially. We also anticipate automotive revenue to be up from the same quarter last year driven by driver assistance and infotainment content.
Let me next turn to the industrial market. In the December quarter, industrial was up 7% from the prior quarter. We experienced sequential growth in factory automation and automated test equipment markets. Days of inventory in the channel remained relatively similar to the prior quarter. In the March quarter, we expect industrial to be up sequentially; industrial is also expected to be up from the same quarter last year driven by automated test equipment, financial terminals and core industrial including factory automation.
Let me next discuss communications and data center. In the December quarter, comms and data center was up 25% sequentially. We experienced the strong ramp in demand for 25G optical products for base stations and 100G optical products for data center applications. We are excited about the rapid deployment of our analog laser driver products. Hyperscale data centers and 5G base station uplinks need to move more data while staying within their already constrained power budgets.
Maxim's transmitter products address both challenges within the power and cost constraints of our customers. In the March quarter, we anticipate comms and data center revenue to be strongly up from the prior quarter. In the past our optical business has shown large demand fluctuations based on customer CapEx deployments. We are currently enjoying a period of strong demand. Comms and data center is expected to be strongly up from the same quarter last year in 100G optical for data center and 25G optical for 4G and 5G base station applications.
Finally, let me turn to consumer. In the December quarter, consumer was down 15% sequentially, as expected weakness in smartphones and seasonal declines in other customer electronics. The peak of holiday shipments for consumer electronics that occurred in the September quarter, at the March quarter, we expect consumers to be flat sequentially, gaming gross, new flagship phones ramp, and other customers are expected to be seasonally down. Consumer is expected to be down strongly from the same quarter last year.
To summarize, we have built Maxim to be resilient and to position the company to outperform as conditions get better. Market demand is improving and we expect revenue growth in the March quarter compared to the same quarter last year in communications and data center, industrial and automotive. We are executing on our strategy to grow revenue with new design wins and long-lived products in automotive and industrial. Our analog business model and flexible manufacturing strategy enable consistent company profitability and stability.
Now, I'll turn the call over to Brian.
Thanks, Tunç and thank you to everyone on the call today. Revenue for fiscal Q2 was $551 million, up 3% sequentially and $6 million higher than the midpoint of our forecast range entering the quarter. Compared to the same quarter a year ago, revenue was down 4%. Our revenue mix by major markets in Q2 was approximately 30% industrial, 26% automotive, 24% comms and data center and 20% consumer.
Now let me turn to our distribution channel. Distribution comprised 51% of Maxim's revenue in Q2. We ended the quarter with just 49 days of channel inventory, up one day from the prior quarter and well below our long-term target of 60 days. Our lean channel inventory was enabled by our tight inventory management, combined with stronger-than-expected resells for optical and BMS products.
Turning to the P&L; Maxim grow its margin, excluding special items was 66%, up 100 basis points from the prior quarter and above the midpoint of our guidance with the increase driven by favorable manufacturing efficiencies. Operating expenses excluding special items were $188 million, up approximately $3 million from the prior quarter, reflecting the full quarter impact of annual merit increases for employees and an increase in variable compensation due to higher profitability.
Q2 GAAP operating income excluding special items was $176 million. Operating margin was 31.9% of revenue, up 160 basis points from the prior quarter due to higher revenue and improved gross margin. The key to GAAP tax rate excluding special items was 13% and equal to our current outlook for the remainder of this fiscal year. GAAP earnings per share excluding special items was $0.56, $0.03 above the midpoint of our guidance range.
Turning to the balance sheet and cash flow; total cash, cash equivalents and short-term investments were $1.8 billion, down $10 million from the prior quarter. Q2 inventory days ended at 109, down six days from Q1, and inventory dollars were down 5% from the prior quarter, capital expenditures were $14 million. Trailing 12 months free cash flow defined as cash from operations less capital expenditures was $737 million or 34% of revenue. Free cash flow per share was $2.70 and our free cash flow yield is 4.5% at yesterday's closing stock price.
For capital return share repurchases totaled $108 million in Q2 as we bought back approximately 1.9 million shares. Dividends totaled $130 million in the quarter. Based on yesterday's closing stock price in our quarterly dividend of $0.48 per share our dividend yield is 3.2%. Total return of cash through dividends and share repurchases was 126% of free cash flow on a trailing 12 month basis.
Now turn to our outlook for the March quarter. Our beginning fiscal Q3 backlog was $456 million based on this beginning backlog and expected terms earnings forecast Q3 revenue to be between $555 million and $595 million, up 4% from the prior quarter and up 6% year-over-year at the midpoint.
Q3 gross margins' excluding special items is forecasted at 65.5% to 67.5%, up 50 basis points from the prior quarter at the midpoint on higher revenue. Q3 operating expenses excluding special items are expected to be up approximately $2 million for Q2, driven by higher variable compensation on increased profitability. Fiscal Q3 capital expenditures are expected to be approximately 3% of revenue and our cash rate excluding special items is expected to remain at 13%.
For Q3 GAAP earnings per share excluding special items, we expect the range of $0.57 to $0.65. In summary, were pleased to see improving business trends with an outlook for continued sequential revenue growth in the March quarter, along with the return year-over-year revenue growth. That growth combined with our strong financial model enables us to generate increasing profits cash flows and shareholder return.
With that I will turn the call back over to Kathy.
Thanks, Brian. That concludes our prepared remarks and we will now open the call for questions. We'd like to continue the same Q&A process that we've used in previous calls. We'll take one question from each caller, so that we can get to as many people as possible. Jonathan, could we please have our first question?
Our first question comes from the line of Ross Seymore from Deutsche Bank. Your question please.
Thanks for letting me ask the question and congrats on the strong quarter and guide. Tunc just wanted to go back to the last quarter and compared to this quarter. A quarter ago I think stabilization was the operative phrase you used to describe the business. Seems like things have gotten better across the board, given your guidance, can you just give us an update on either geographically or by end market, do you think it's true and demand getting better or is it that 49 days of inventory in the channel, which is still very low just starting to refill as you look into the March quarter?
So I will summarize what I said in the prepared remarks. But essentially considering our Q3 guide, we're seeing a few things happening and number one we have some good growth really market demand growth in our automotive products and in our optical products for both data center and 5G. So that's strong demand we're seeing from our customers with a nice growth. On the other hand on the industrial side, we're not really seen a full recovery I would say two year ago levels but both Q2 and Q3 have some growth compared to the same period last year. So what we're seeing there is reasonable demand coming from customers and all of this. We've been able to also maintain lean inventory levels in the distribution channel. So I think one of the questions that we got last quarter was the growth really coming from refilling the inventory and distribution that's not what we did. So essentially very strong growth in some areas that I mentioned in automotive and comms data center but we're seeing a broadening increase in demand. And geographically, I guess, geographically may be Brian can answer that piece.
Sure, geographically particularly as we look at resells through distribution. The Asia region continues to be the strongest with particular strength in China and in terms of soft areas; Europe continues to be a little bit weak.
Thanks.
Thank you. Our next question comes from line of Harlan Sur from JP Morgan. Your question please.
Good afternoon. Solid execution on the quarter, guys, and good to see the return of year-over-year growth this quarter. It's a little bit hard to calculate exactly because of the revenue segmentation change in fiscal 19, but it looks like your auto business had another year of outperformance, I think it was flat to may be slightly up in calendar year 19 versus auto production that was down about 5% to 7% this year, the outlook is for flattish auto production growth and within that, I think China EV production is targeted to go about 8%. So given your exposure to some of the faster growing segments like EV and ADAS with some of your serial linking BMS products, do you think that this segment can approach kind of low teens percentage year-over-year growth as the year unfolds?
Okay, so let me take that one. So essentially with what you summarize, there will with our exposure to EV which is the faster growing segment estimated through about 20% per year and our good market position with our BMS products and also in ADAS we have a lot of design when we had in the past few years and those are ramping into production. So those two segments, we believe we are going to grow at much better rates than our average. Infotainment more tied to growth in the car units, but that's doing pretty well to the recently. So you know it's really hard to exactly predict, but I think we continue to believe that we can grow faster than car production units globally. A, because contents growth is faster than car production units and B, because we've invested and have great products and technology for two of those segments that are I would call it an hyper growth globally. So yes, we will grow, you stated a number. I'm little reluctant to give a number, but we believe for this year that long-term we do expect in automotive to grow in the low teens.
Thanks, Tunc.
Thank you, Harlan.
Your next question comes from the line of Ambrish Srivastava from BMO. Your question please.
Hi guys this is Jameson [ph] calling in for Ambrish. So I was hoping just to continue touching on auto. So we will appreciate the fact that you outgrew autos are [ph] and I believe you said the auto was grew 5% sequentially. I believe last quarter you have guided to be up strongly. So first, was just below your previous expectations and second can you talk about the broader auto demand environment and what gives you confidence in the guide for that market to be up strongly in the March quarter? Thank you.
So, I'm going to do a little bit from memory and I think Kathy can help me here. We did guide to strong growth. I think we were maybe a little bit under that but not a large number. So I think that we were -- came pretty close maybe slightly lower in the previous quarter. This quarter, we know we are seeing very strong demand especially for our products that go into ADAS system. So that's the strong growth driver for us. And we've got some good design wins in China OEMs, which I mentioned in the call. So there is some specific areas in automotive that are doing really well for us. And as we've spoken last time you know some of the slowing growth we saw in automotive, we attributed to maybe inventory suggestion as car production slowed last year. So the fact that were also believing that were seeing that infotainment will be another growth, so things like that may be confirming that maybe some of that inventory is now being digested by car manufactures structure. So we're feeling pretty good about the demand we're seeing in automotive for this quarter.
Thank you.
Thank you. Our next question comes from the line of Vivek Arya from Bank of America. Your question please.
Hi, this is Blake [ph] for Vivek Arya. Just curious how we should think about the virus impacting China's current Q1 and if there is any impact which end markets specifically you see that having more of an impact versus others. Thank you.
So obviously there is development about restrictions in travel and so on we've heard pretty recently. So to get a full assessment on which market it will affect having a comprehensive view on that is pretty short frankly we have to figure that out. In the areas that are affected. There are some of our optical margins makers are in that region and they have communicated that they will shut down a bit longer than the normal lunar year shutdown. So there will be some effects on that. We don't believe it's going to be a large effect on us but that's the only customer information that we have some specifics on so far. We don't believe that's going to have an impact on our total revenue for the quarter.
Got it. Thank you.
Thank you, Blake.
Thank you. Our next question comes from the line of John Pitzer from Credit Suisse. Your question please.
Good afternoon guys and congratulations on the solid results. Tunc, I'm just kind of curious about the backlog coverage you're bringing into the March quarter. It's about at the midpoint of your revenue guide, about 79% which is as high as I think I've seen it, so help me understand other than trying to take a conservative stance because there is still some macro uncertainty out there, is anything specifically that's driving the backlog coverage to be this high versus what's usually kind of in the low 70s is business mix in Denmark, is that a more backlog oriented than terms, just help me understand why terms couldn't be better in the quarter?
Hey John, this is Brian that's a great observation. And as Tunc mentioned, we've had very strong demand for our optical products and so what you're seeing is the effect of higher than usual amount of optical orders in our backlog that we don't expect to ship all of which this quarter.
Perfect. Thank you.
Thank you, John.
Our next question comes from the line of Craig Hettenbach from Morgan Stanley. Your question please.
Yes, thank you. Tunc just a follow up on your comments about wireless BMS at CES, can you just talk about the development there and just guess that the timeline in terms of product introductions and then what period of time, could you see those products eventually come to the market?
So wireless BMS is a technology that we have been working on. Essentially what we develop in nutshell was a way to be able to connect all of our individual, essentially metrology chips that are on the packs to talk to a central control unit through wireless technology. We demonstrated it, it can be done. Obviously we need to do more work to make sure that it is as robust as wire technology. So as you predicted that's going to take a little bit more time. It's hard for us to really tell exactly one, it will gain enough customer acceptances in terms of how robust it is as a complete system. But revenue from this will not is not on the horizon for multiple years. So it's really just technology that we're showing but we have to productize it in a way that's equivalent to our SLD [ph] solutions that we have in our wired products right now. So revenue wise multiple years in the future.
Understood, thanks.
Thank you, Craig.
Our next question comes from the line of C.J. Muse from Evercore. Your question please.
This is Matt [ph] calling for C.J. Just want to dig a little more into the comms and data center side of the business. Strong than expected this quarter, great guide next quarter. So can you just going to dig into little bit more what's driving that uptake across 2500 gig and 100 gig and how sustainable are those trends as we kind of think through all of calendar 20?
So, there are really two components to the strong growth in comms and data center. One of them is in data center where we're selling products that are 100G or 4 by 25G length. We have a strong presence and good design wins on the laser driver portion for which we basically have an analog solution and that if you recall, you know, we had strong growth in that about a couple years ago. And then there was a lot of inventory built at our customers and the module makers took us a while to drain that down and now back for the last two quarters. So that's the story there. I think we would get into a healthy level of consumption on those products as the cloud customers essentially are deploying more data transport capability in their data centers. So that's what driving that so that's really a recovery from an inventory correction last year.
On the 25G front, one lane by 25 transceiver I see plus some trans-impedance amplifier products and like a system management chip for a module, so it's kind of a set of products that we sell into that and that solution is a very popular for 5G and 4G installations that are going to be made 5G ready for base stations. And in that we're seeing a strong growth, especially now coming from China because we have again popular solution that everybody liked and these designs were one probably about a couple years ago.
So that's what's ramping as long as the 4G, 5G rollout continues, I think we're going to continue to sell these products because of our strong market position. But as I said in my prepared remarks both of these businesses, and especially the 25G connections, this business is kind of lumpy and right now, we're enjoying a good spot but those of you that follow these markets always remember in the past that there are times when there's some inventory digestion that happens and so on. But I think right now fundamentally long-term even if we get these lumpiness I think these are good growth markets because of the amount of data that's being moved both in data centers and in wireless.
Thank you.
Thank you, Matt.
Thank you. Our next question comes from line of Mitch Steves from RBC Capital Markets. Your question please.
Actually wanted to focus on the consumer side, looking that's seeing a lot more pressure than we thought at least near-term, can you walk through -- what do you guys expect from me with a full year out of that business in terms of like the calendar year, I mean this is like company-specific anything that's industry-wide issued that we will see particular since Apple reported numbers are pretty solid in the quarter?
So just to remind everybody our consumer business walk back a few years ago was pretty concentrated on our largest customer. Our strategy is been for multiple years to diversify the business to go to multiple other customers as well as other markets even as same customers. So we've been executing on that plan. If you look at our guidance into the current quarter basically, we have large customers ramping a new flagship phone. We got good demand for our gaming products but many of the other products really go into a seasonally week period after the holiday season. So were seeing that. Our seasonality is definitely changing, maybe it's already changed to be more heavier in Q1 then it is used to be in basically in our Q3. So it's going to be heavier in Q1 of the next fiscal year. Now question about is are we seeing something that's particular the Maxim, content has gone down and our largest customer. So you're seeing the effects of that but we are seeing good demand from other customers, but it takes a while for this all to balance out.
Thank you.
Thank you, Mitch.
Thank you. Our next question comes from the line of Blayne Curtis from Barclays. Your question please.
Hey guys this is [indiscernible] for Blayne Curtis, congratulations on the nice results. Looking at March here, you guys have obviously come from levels with you know some weaker trends and you're seeing above average growth in terms of seasonality. Can you remind us what normal seasonality for June is? I know you just finished talking about how consumers are little bit different than historically. But what's the right way to think about the entire business since the fourth fiscal quarter and do you think just coming from a lower base that you can outgrow that?
I assume you asked about the March quarter, not seasonality correct.
March seasonality and for the rest of the fiscal year, if that's okay.
So have the seasonality numbers in front of me but I'm sure Kathy is going to help me out here.
Tom, this is Kathy. Of course we're guiding one quarter at a time but we do usually see that the first half of any given calendar year is better for industrial and automotive. And historically as Tunc outlined in his last question and answer, we have historically benefited from ramp and smartphone revenue in June quarter but that's changed now because of the lower content that we have with that customer. So Samsung is much smaller part of our revenue and so we should not expect that to current this year in June quarter. And then finally for comms and data center. Given the lumpiness of optical it's hard to predict, there is not really a seasonality that we can point to there.
Thank you.
Sure.
[Operator Instructions] Our next question comes from line of Jeremy Kwan from Stifel, Nicolaus. Your question please.
Yes and let me add my congratulations on a solid quarter. Question on the automotive side you mentioned better management ADAS those are growing very nicely they are key drivers in that segment. Can you give us a sense of how big that is relative to your legacy or the larger auto business?
So let's say if we took Q3 as an example, roughly half the business, half of automotive is infotainment and if you look at BMS and ADAS they are probably in the range of the mid-teens of automotive each, so that's kind of gives you an idea. I mean these numbers vary because mix changes quarter over quarter. So have infotainment mid teams for BMS and probably around mid-teens for ADAS roughly. Does that answer your question?
That's very helpful. Where do you see that going in the next three to five years that proportion?
It's hard for us to predict that but a higher would be obvious answer, we clearly growing if you look at some of the numbers we quoted double digits and so on. Clearly it will grow pretty quickly, just to give you an example similar call a year or two ago, we would use the same prepayment was 60% to 70% of the business, so the rest of its grown pretty nicely.
Great. Thank you.
Thank you. Our next question comes from the line of Tore Svanberg from Stifel. Your question please.
Hi and congratulations on the quarter. I'm not sure if this question has been asked, if you have addressed this but Intel on their call talked a lot about very strong data center dynamics over the first half, but then, kind of expecting a slowdown, second half. I know it's very early on, and I don't even know we have the visibility but do you have any thoughts on that particular topic?
Honestly, I don't think we're going to add anything to Intel, know they know their customers better than we do and remember that were are one or two farther away from them because we're selling to mostly our data center customers are module makers that are selling to cloud customers. And I think, I don't think we can say anything that either confirms or denies with Intel let's say. My recommendation would be to go with there, whatever they are projecting. Sorry, I couldn't help you on that one.
That's fair, thank you. My follow up is on the channel inventory, so obviously below your target and I was just wondering what the dynamics are there, is it mainly because of shortages or it just customers being gun shy about visibility, just trying to understand why it's running still quite a bit below your long-term target?
I want to make sure I understand your question. Your question was about China inventory?
No channel inventory, not China.
Channel inventory; I mean, essentially channel inventory, as you know, it's running below our model and our desire to bring a back up to what our model levels are and we actually said that in the last call, but we saw as you stated, we saw stronger demand for the optical products especially and that causes not be able to completely catch up to what we wanted. Our read is that the end demands for these parts are pretty strong. So they are basically being consumed pretty soon after we ship them and there is not much inventory because of strong demand more than anything.
So I would just add to that Tore, its Kathy. So we also highlighted last quarter that were starting to ship serial linked products to Chinese OEM in automotive and that goes to [indiscernible]; we saw strong resale of those products as well. So there are some Maxim-specific products that are doing quite well in a resale to China.
That's very helpful. Thank you very much.
Thank you. This does conclude the question-and-answer session. I'd like to hand the program back to Kathy for any further remarks.
Thank you, Jonathan. That concludes today's conference call. Thank you for your participation and for your interest in Maxim.
Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. Everyone have a great day.