Analog Devices Q2 2022 Earnings Call Transcript

Quartr
Provided by Quartr
May 18, 2022

There are 10 speakers on the call.

Operator

Good morning, and welcome to the Analog Devices Second Quarter Fiscal Year 2022 Earnings Conference Call, which is being audio webcast via telephone and over the web. I would like to now introduce your host for today's call, Mr. Michael Lucarelli, Vice President of Investor Relations. Sir, the floor is yours.

Speaker 1

Thank you, Katrina, and good morning, everybody. Thanks for joining our Q2 fiscal 2022 call. With me on the call today are ADI's CEO and Chair, Vincent Roche and ADI's CFO, Prashanth Mahendra Bajah. For anyone who missed the release, you can find it and relating financial schedules at investor. Analog.com.

Speaker 1

On to the disclosures. The information we're about to discuss includes forward looking statements, which are subject to certain risks and uncertainties as further described in our earnings release and our periodic reports and other materials filed with the SEC. Actual results could differ materially from the forward looking information as these statements reflect our expectations as of the date of this call. We undertake no obligation to update these statements except as required by law. Our comments today will also include non GAAP financial measures, which exclude special items.

Speaker 1

When comparing our results to our historical performance, special items are also excluded from prior periods. Reconciliation of these non GAAP measures to the most directly comparable GAAP measures and additional information about our non GAAP measures are also included in today's earnings release. And with that, I'll turn it over to ADI's CEO and Chair, Vincent Rose. Vince?

Speaker 2

Thank you, Mike, and a very good morning to you all. Well, I'm very pleased Report that ADI delivered another quarter of record revenue, profitability and earnings driven by continued insatiable demand for our products, strong operational execution and accelerated synergy capture. Moreover, amidst a dynamic macro environment, We're operating from a position of remarkable strength supported by our record backlog, robust bookings and ongoing capacity expansions, which position us favorably as we enter the second half. Now moving to a summary of our results. Revenue was $2,970,000,000 above the high end of our outlook and up 28% year over year on a Impressively, adjusted gross margin expanded to 74% and operating margin to 50%.

Speaker 2

Adjusted EPS was $2.40 exceeding the high end of outlook and increasing over 50% from the year ago period. Overall, I'm very excited with our performance and our team's outstanding execution. Today, I'd like to reinforce What we shared at our Investor Day around how our markets are evolving and how we're investing to solve more of our customers' problems, while also improving on our business model that's both rich with growth opportunities and indeed resiliency. The next wave in the evolution of the ICT sector is the nascent Intelligent Edge Revolution. It will be characterized by ubiquitous sensing, hyperscale computing and pervasive connectivity, Pushing processing and intelligence closer to the edge.

Speaker 2

Semiconductors are the bedrock enabling this next wave. And ADI, where data is born, is at the center of this revolution. At our core, We're an innovation driven enterprise over the last decade through both robust organic investments and strategic M and A. We've built the industry's broadest and highest performance analog, mixed signal and power portfolio. Our offerings span from microwave to bits, nanowatts to kilowatts, sensor to cloud and increasingly from components to subsystems.

Speaker 2

Our vast arsenal of technologies, along with the deep level of engagement and support we provide our customers, has earned us the number one positions in analog, mixed signal, RF and high performance power. This coupled with our focus on customer success awards ADI with an innovation premium that is reflected in our ASPs that are more than 3 times the industry average and also industry leading gross margins. The growing scope of our customers' products is dramatically expanding in complexity and pressuring their product development teams and innovation cycles. To meet these challenges and deliver the next waves of disruptive innovations, we're investing over $1,600,000,000 in R and D annually. These investments strengthen our broad market franchise and enable us to expand our SAM in vertical applications where more complete solutions are necessary.

Speaker 2

We achieved this by integrating our core analog technologies with increasing levels of digital algorithms and software. Now let's look at how our technology is intersecting with our markets. Industries like transportation, energy, telecoms, Manufacturing and Healthcare are prioritizing digitalization. This is driving new generations of applications And fueling a host of concurrent secular growth trends. And I'd like to touch on just a few now.

Speaker 2

Starting with automotive, Here ADI is the market leader in battery management systems, for example, for EVs. Our battery management systems or BMS Solutions offer customers the highest levels of accuracy, reliability, safety and security. Our wireless BMS solution offers all the benefits of wired, but also enables rapid battery pack configurability and cost effective scaling of our customers' EV fleets. This innovative solution continues to gain traction in the market and adds to our content per system by up to 2 times. Moving to communications, where ADI is the market leader in radio signal chains for 5 gs with a majority share across the ecosystem.

Speaker 2

Our latest generation transceiver includes a fully integrated digital front end and grows our SAM by 2x. This innovative radio architecture reduces system cost and waste and improves power efficiency. Further, The flexibility of these software refined solutions allows them to be used across traditional 5 gs networks as well as in emerging Open RAN and LEO satellite networks. Lastly, healthcare. We have a number one position with dominant share in medical imaging, for example.

Speaker 2

Subsystems like our photons to bits module are used by the top CT players in the world. Our solution delivers the highest fidelity images while decreasing radiation dosage. And in the process, it allows us to capture 4 times the sand compared to offering just components alone. In addition to expanding our innovation edge across these secular trends to amplify growth, The Maxim combination creates a $1,000,000,000 revenue synergy opportunity for us over the next 5 years. The first opportunity arises from customer cross selling, leveraging our complementary relationships to pull through our extended portfolio.

Speaker 2

2nd is fusing together the new product roadmaps of these 2 premier analog portfolios to push the boundaries of what's possible. And third is power management. Here the combination with Maxim increases our breadth of power capabilities, creates a more cost competitive portfolio and adds to our engineering talent pool. As a result, we unlocked $4,000,000,000 of additional Power Sam and look to double our power revenue in the years ahead. The proliferation of the Intelligent Edge And our revenue synergy opportunity gives me great confidence that we can bend the growth curve upwards, Moving from our historical mid single digits growth rate to our new model of 7% to 10%.

Speaker 2

Now I'd like to speak a little to the unique resiliency of our business. The diversity of our portfolio is a source of great strength. We shipped 75,000 product SKUs, which support thousands of applications to over 125,000 customers. Notably, 80% of our revenue is derived from products that individually contribute no more than 0.1% of total revenue. And the longevity of our products is unmatched.

Speaker 2

On average, our products have lifespans of a decade or more effectively delivering recurring revenue streams for decades. It's these characteristics that create a high barrier to entry and an enduring business model. Finally, we utilize a geographically diverse hybrid manufacturing strategy to tame the complexity and fragmentation of the analog market. This strategy provides us with a broad array of technology and packaging necessary to create innovative solutions from 7 nanometers to 7 micrometers. At the same time, this model creates a diverse network of internal and external partners to best manage our operations through economic cycles.

Speaker 2

As we mentioned at our Investor Day, we're investing in our internal manufacturing operations to build a more robust and Cost effective model. To that end, we're doubling the capacity of our internal factories and adding significant capital to our product test operations. These investments will grow our output this year and into 2023 and increase our swing capacity across our network to over 70% of revenue. So in closing, ADI is a leader in innovating at the edge And I believe that our best days are still ahead of us as we drive increased value for our customers, shareholders and society. And with that, I'm going to pass it over to Prashant, who'll take you through the financial detail.

Speaker 2

Thank you, Vince.

Speaker 3

Let me add my welcome to our 2nd quarter earnings call. It was great to see and hear from so many of you at our Investor Day last month, And it was also exciting to welcome so many of our customers to demonstrate our technologies in action. As usual, my comments today with the exception of revenue will be on an adjusted basis, which excludes special items outlined in today's press release. We printed another very impressive quarter with record revenue, These strong results reflect increasing demand for our highly differentiated products aligned to multiple secular trends as well as our ability to leverage our hybrid manufacturing model, offset inflation and accelerate synergy capture. 2nd quarter revenue of $2,970,000,000 finished above the high end of our outlook with every B2B end market exceeding initial expectations.

Speaker 3

This marks our 5th consecutive quarter of record revenue and our 9th straight sequential growth period. So let's look at the performance by end market. Industrial, our most diverse and profitable end market, represented 51% of revenue and hit another all time high. We experienced broad based growth With digital healthcare, automation, instrumentation and test leading the way, underscoring increasing content and our strong position in these secular markets. Industrial has now grown more than 20% year over year for 6 straight quarters.

Speaker 3

Automotive, which represented 21% of revenue, also achieved another record, with All applications growing double digits year over year. In BMS, where we hold the number one position, Our quarterly revenue eclipsed $100,000,000 for the first time. We expect strong growth to persist given the momentum in the market and our continued design wins. Additionally, our A2B and GMSL solutions, which together make up roughly 20% of automotive continued on their secular growth path fueled by the digitalization of the automobile. Communications represented 16% of revenue with robust broad based growth.

Speaker 3

In wireless, we experienced growing demand across our RF portfolio as 5 gs deployments, particularly in North America, gain momentum. ADI's latest generation transceiver, which Vince spoke to, is ideally positioned to capitalize on the virtualization trend. In wireline, demand for our optical and power products remained strong as carriers and hyperscalers invest to meet the ever growing demand for bandwidth. And lastly, Consumer represented 12% of revenue and has now grown year over year for 6 straight quarters. This consistent growth is a function of our product and customer breadth, which better insulates us from the typical fluctuations associated with PCs and portable devices.

Speaker 3

Now on to the P and L. Gross margin was a record 74.2%, increasing 2 30 basis points sequentially and 3 30 basis points year over year. Favorable product mix, high utilization and revenue growth and synergy fall through were key drivers of the increase. OpEx in the quarter was 710,000,000 Better than anticipated, owing to faster synergy execution. Record operating margins of 50.3% grew 4 50 basis points sequentially and 8 60 basis points year over year.

Speaker 3

At the end of the second quarter, we realized over $250,000,000 of cost synergies. We look to quickly achieve the remaining synergies and hit our recently increased target of $400,000,000 in savings exiting fiscal 2023. Non op expenses were $41,000,000 and the tax rate for the quarter was 13.2%. All told, adjusted EPS came in at a record $2.40 up more than 50 1,700,000,000 of cash and equivalents. Days of inventory increased sequentially to 122 and channel inventory remains below the low end of our 7 to 8 week target.

Speaker 3

If we look at cash flow, CapEx for the quarter was $119,000,000 $447,000,000 over the trailing 12 months or 5% of revenue. Internal capacity while enhancing the resiliency of our hybrid model. To that end, as we stated at Investor Day, We expect CapEx as a percentage of revenue to be in the high single digits during fiscal 20222023 before reverting back to 4% to 6% over the long term. And over the trailing 12 months, we generated $3,200,000,000 of free cash flow or 33 percent of revenue. Included in our free cash flow are one time transaction related costs amounting to about 3% of revenue.

Speaker 3

Given the recent market weakness, we accelerated our repo activity to $776,000,000 during the Q2. This brings our total share repurchase to approximately $3,500,000,000 since the close of Maxim. And we look to maintain this accelerated buyback pace this quarter and achieve our $5,000,000,000 commitment by the end of our fiscal year. As a reminder, we target 100% free cash flow return. We will allocate 40% to 60% of our free cash flow to support a 10% dividend CAGR throughout the cycle with the remaining cash used for buybacks to reduce share count annually.

Speaker 3

And now on to the outlook for Q3. Revenue is expected to be $3,050,000,000 plus or minus 100,000,000 We expect all end markets to grow sequentially. Given our higher than normal annual merit increase, Operating margin is expected to be 49.5 percent plus or minus 70 bps. And our tax rate is expected to be between 13% 14%. Based on these inputs, adjusted EPS is expected to be $2.42 plus or minus $0.10 While we are very mindful of the current economic trends, our demand indicators remain very strong and our customer conversations remain upbeat, giving us confidence for continued growth for the remainder of 2022 and likely into 2020 Importantly, as a result of our vast diversification, leadership in numerous secular growth markets, additional synergies and our resilient hybrid manufacturing model.

Speaker 3

We believe ADI has never been better positioned to transcend cyclical downturns and accelerate long term growth. Let me now give it back to Mike to start the Q and A.

Speaker 1

Thanks, Nishant. Let's get to our Q and A session. We ask that you limit yourself to one question in order to allow for additional participants on the call this morning. With that, Katrina, can we have our first question please?

Operator

Our first question comes from Tore Svanberg with Stifel. Your line is open.

Speaker 4

Yes, thank you. Congratulations on all the record results, Especially on that 50% offering margin. My question is for Vince. Vince, towards the end of your remarks, you talked about Growing output to increase swing capacity to 70% of revenues. Could you perhaps elaborate a little bit on that?

Speaker 4

And what is sort of the timeline exactly for when you would hit that number?

Speaker 2

Yes. So as you know, Tore, we've been investing in our internal semiconductor manufacturing operations from 0.18 micron upwards, and we're doubling the output there over the next year or thereabouts, a year or 15 months. And of course, we cross license technologies with some of our foundry partners. So when we talk about 70 It means that because we will have cross qualified some of the process technologies between ADI internal fabs and the external fabs That are controlled by our foundry partners. We get the ability to move utilization, if you like, from one place to another depending on what Part of the cycle we're in, in terms of managing utilization inside ADI And be able to meet the demand as it surges or declines.

Speaker 4

Great perspective. Thank you.

Speaker 1

Thanks, Dorey.

Operator

And your next question is from Stacy Rasgon with Bernstein Research. Your line is open.

Speaker 3

Hi, guys. Thanks for taking my questions. I wanted to ask about the gross margins. You mentioned a bunch of drivers, But you actually didn't mention pricing at all in your outlook there for the drivers. I mean, what impact has pricing had Either to offset inflation or to potentially reprice the Maxim portfolio after the closure.

Speaker 3

And I guess how do we think about The forward gross margin trajectory at these current like revenue levels, I mean, is there room for it to even go up from here assuming the revenue levels kind of stay on the current trajectory? Good morning, Stacy. Thank you for the question. So as you know, we along with the rest of the industry has been Passing along the higher costs. We have been very focused on not using this environment to take advantage of our customers, but to really maintain our gross margins.

Speaker 3

So in 2021, we had some headwind From the timing of inflation versus when we were able to enact the pricing, this has really abated in 2022. So really the gross margin percentage and growth in gross margin percentage that you see is really being driven, as I mentioned, by The synergies, great utilization of the internal fabs and some mix benefits. I think in my prepared remarks, I talked about Industrial hitting 51 percent of the overall revenue mix. So for the forward look, we updated our model just Couple of weeks back and we feel very comfortable that in a typical cycle trough, We are going to be able to maintain a 70% floor. Beyond that, we will continue to make the right trade offs with opportunities to expand the top line and at some Trade off on gross margin.

Speaker 3

So really the focus for the team is deliver the revenue growth and let that leverage drive all the way down through cash flow. So I wouldn't encourage folks to look for significant margin expansion. These are already pretty incredible numbers. But if the revenues kind of stay at this trajectory, can at least the gross margin stay where they are, will they just fluctuate around, will like mix be the biggest driver from here or? Yes, that's the right way to think about it.

Speaker 1

Yes, Stacy, you're right. If you look at our real margin at this point going forward, it's mix utilization and then we also have the $125,000,000 of synergies, some of that will be on the cost of goods sold side. As Prashant laid out, we'll balance Both gross margins really to drive operating margin and free cash flow.

Speaker 3

Got it. That's helpful. Thank you, guys. Thanks, Stacy.

Operator

And your next question is from Vivek Arya with Bank of America Securities.

Speaker 5

Thanks for taking my question. Vince, I think Prashant mentioned that industrial sales have grown over, I believe it's over 25% for the last 6 quarters and seem like they could be strong for another 2 or 3 quarters. I'm curious, how do you think about the normalized growth rate? And what macro indicators do you look at to say this is what ADI's industrial growth should be like? What are the early signals that you get to give you a sense whether you're over or under shipping, end demand.

Speaker 5

Because from the outside, we look at all the turmoil in China, we look The turmoil in Europe, but then we look at this very strong industrial growth number and it gets harder to kind of reconcile, right, these two narratives. So give us a sense for How do you feel about specifically your industrial business right now?

Speaker 2

Yes. Thanks, Vivek. So, 1st and foremost, it's a highly diversified industrial business That we've been diligently investing in from an R and D perspective, from a customer engagement perspective Over the last decade or 12 years with a renewed focus, We've been gaining share very, very clearly. I think our portfolio, particularly combined with the power activity as well from the LTC and Maxim Acquisitions puts us in an even better sense to capture more sand essentially. And to your question on growth, I would say that during the Investor Day, we said that the new model is 7% to 10%.

Speaker 2

So I think It's going to be right in there somewhere over time. And we feel more confident now, I think, about our industrial growth than we've ever done, just Given the strength of the portfolio, the customer engagements and so on. In terms of the signals we watch, Obviously, we have a lot of conversations with our customers. I personally have had a stream of conversations with Many of our largest industrial customers over the last quarter. And I think what they're all Trying to convey to us is that things are different.

Speaker 2

We're moving into a new industrial cycle. Industry 4.05.0, IoT or I beg your pardon, IT and OT, if you like, colliding in a new Partnership for the future driving a lot of new technology. So that's one, obviously, one stream of input we get. The other Signals we look at obviously are the PMIs, the machine tool builders indexes and so on and support. So, well, I think the greatest source of insight For us, it's our own knowledge of the end applications coupled with our customers' insights.

Speaker 5

Thank you, Vik.

Speaker 3

Vivek, maybe I'll just add. I think I said in the remarks, but to be clear to everyone, Our growth in industrial was broad. All applications hit record results in 2021 and are on track to hit another record in 2022.

Speaker 5

Very helpful. Thanks, Prashant.

Speaker 3

Thanks, Yves.

Operator

Your next question is from C. J. Muse with Evercore. Your line is open.

Speaker 6

Yes, good morning. Thank you for taking the question. And I guess a comment on my side with these results, I'm surprised you didn't have Big Papi and Tom Brady at your Analyst So next time. So to my question, your results much better than your peers. Your B2B business, I think, Up 11% versus your peers at mid single digits.

Speaker 6

How do you think about the outperformance there? Is a part of that your ability to source incremental supply, Market share gains, right mix, would love to hear your thoughts there. And then as you think about the future going into the second half of this year and next, How does that inform your vision for continued outperformance? Thank you.

Speaker 3

Yes. Sifu, maybe I'll start and then hand over to Vince. So on the tactical side, we are working on getting additional Both from our external partners as well as the investments we're making internally. So you'll see That continue to play out over the course of the year, which is why I mentioned in the prepared remarks, look for us to continue to grow sequentially through this year and Likely at least into the early part of next year. We've talked about pricing that has been a little bit incremental to the revenue growth, That's certainly a piece of it.

Speaker 3

And the demand has just been very broad based. And again, I said it in the remarks, but to be clear, We are seeing demand across all end markets and all geographies. It is very it's very evenly spread and strength across All end applications. So we do feel to Vince's remarks here, we do feel very well positioned that our technology is really starting to hit Sweet spot across all of our customers. And then maybe I'll pass it to Vince to add some more.

Speaker 2

Yes, maybe just a little bit of color on the markets, So, CJ, trying to answer your question. So, we have so many vectors of growth now, for example, in industrial. We're basically playing in all the high end And as I said, we've been tuning the R and D continuously, the customer engagement. And if I just pick out Healthcare is an example. That's beginning to get onto a $1,000,000,000 run rate now.

Speaker 2

It's been growing consistently for the last 7, 8 years at the double digit level. Aerospace and Defense, we see that actually no matter what the cycle will be over the next few years, this is going to be an area of great strength for us. And in the communications area, great position in 5 gs, but interestingly, our wireline and data center business now On a par with the wireless sector in terms of revenue contribution. So it's kind of half and half. So We see that again as a source of strength, but just also by a lot of the technologies that Maxima brings to that wireline area.

Speaker 2

Automotive, we have a great story on the incumbent experience With AtoB, road noise cancellation, premium sun systems being more and more deployed, electrification, We're on a 100 a quarter run rate now, revenue run rate. And We have design ins at virtually all the electric car companies at this point in time. So we see that on a trajectory to $1,000,000,000 Plus in the foreseeable future. So that's just some of the examples to Compliment what Prashanth has narrated as well in terms of the sectors of growth and prosperity for the company.

Speaker 1

Very helpful. Thank you. Thanks, Vijay.

Operator

Your next question is from Ambrish Srivastava from BMO. Your line is open.

Speaker 7

Hi, good morning. Thank you very much. I had a question on the cost synergies, Prashant, how should we be modeling these on a go forward basis? You said exiting fiscal 'twenty three, But what's the breakout? And then kind of related to that is when we're talking about gross margin, I was a little bit surprised that you said the inflationary pressure would be abating as we go into as we continue through this year.

Speaker 7

Did I catch that right? Because inflation the headline numbers seem to be But they haven't maybe they have peaked, but definitely higher than where they were last year. So would help some color on that comment as well.

Speaker 3

Yes. Thanks, Ambrish. Two good questions and thanks for giving me the opportunity to clarify. So first on synergies. We had talked when we did the Maxim close that we had great we had some great learnings from LTC on how to get to synergies and that was to move fast and hard and you're seeing us execute against that strategy.

Speaker 3

So we captured basically the entire 275,000,000 that we originally committed to as we exited our 2nd quarter and that at Investor Day, we said we're raising to $400,000,000 and we'll hit that number coming out of where as we exit 2023. That first $275,000,000 was a little more tilted towards cost of goods and the following piece will sort of be balanced between Cost of goods and OpEx. So as you look forward, that's how to think about the balance of that. To your question on the Comments I made. Thank you for giving me a chance to clarify.

Speaker 3

We have used our pricing opportunities to maintain gross margin. So to be clear, we're not looking at pricing as an opportunity to expand gross margin, but really as a way to offset. So when I said Abate inflation, I meant versus the historical inflation that we had experienced in 2021, took us a little bit longer to get those pricing actions in place. So now we have neutralized them and you see that benefit in the current year. And of course, if We do continue to see price increases sorry, cost increases in the coming quarters.

Speaker 3

Expect us, like the rest of the industry, to

Speaker 7

So there's no artifact in the 74% that you reported this quarter for pricing. We should expect Kind of that level on a go forward basis, maybe bounce around based on mix and also the utilization rate.

Speaker 1

Yes. Yes. Ambrish, this is Mike. Yes, we talked about earlier going forward that 74% will bounce around like you said mix utilization of the 2 drivers and as Prashant outlined, that $125,000,000 doesn't have a cost element in it that will also help gross margins. But if you go forward 74%, plusminus, I feel pretty good about that.

Speaker 3

Okay. With the caveat again, I want to make it clear for everyone with the caveat that we are focused on growth. So where it makes For us to be a little more flexible to drive top line, we will do that. So I wouldn't want folks Getting too laser focused on modeling in mid-70s of the gross margin. We've given you a floor and we will give the management team The flexibility they need to drive the top line.

Speaker 7

Right. You've been very consistent about that. Thank you.

Speaker 1

Thanks, Ambrish.

Operator

Your next question is from Chris Danely with Citigroup. Your line is open.

Speaker 1

Hey, thanks guys. So with all this talk on revenue growth, your forecasted sequential revenue growth July is the slowest in a couple of years. Can you talk about why that's happening? And is that because of COVID shutdowns or something else? And then as part of that, with all this Focus on increasing capacity, I would assume your capacity is growing faster than the 2% or 3% sequential revenue so can we assume that the lead times are coming in this quarter as well?

Speaker 3

Yes. So Chris, the sequential growth is Constrained by capacity, but we've indicated that we will see sequential growth through The year. So look for a more meaningful change, as we get past the Q3, which we've been saying for a while. So if you look back at prior comments, We've been very clear that we've ordered the tools and the equipment. We know our position in the queue.

Speaker 3

We know when those are coming in And they go to revenue generation fairly quickly. So we are maintaining our outlook That we will exit the year at a much higher run rate, meaningfully higher run rate than where we are now. And that is all driven By our ability to produce. And what was Perfect.

Speaker 1

Thanks for the verification. Yes. The because I'll add one thing, you're right. The sequential growth is, I'll call it, decelerating now. What happened in the first half of the year, we talked about we added pricing and that added to the growth.

Speaker 1

We had volume and pricing in the first half of the year that's driving sequential. Pricing is really in the model now that the growth in the back half of the year on a sequential basis is really driven by capacity and volume. And if you zoom out and don't look at sequentials and look at year over year, we're We're going to B2B business in our fiscal Q3 by over 20% year over year again. So it's a fantastic result I think and it shows the strength of this franchise.

Speaker 3

Yes. I think we can give everyone the data point that on a sequential basis, think of it as fifty-fifty, the growth is coming from So that falls into the baseline sequentially as you go forward, but pricing falls into the baseline.

Speaker 1

Thanks, Chris.

Operator

Your next question is from William Stein with Truist Securities. Your line is open.

Speaker 8

Great. Thanks for taking my question and I'll add my congratulations to the very strong revenue and profitability and the outlook as well. That was great. But despite all that good stuff, there's a few factors that investors are certainly concerned about potentially disrupting Bookings and potentially revenue performance, of course, the war in Ukraine, the COVID shutdowns in China and raising rates. But there's also a concern, maybe not as prominent, but that we've picked up on, which is customers adjusting orders, Potentially canceling or pushing out because they're very challenged from a kitting perspective.

Speaker 8

You highlighted yourself that you're capacity constrained. Can you help us understand how those factors are affecting your business today and how you anticipate them playing out in your business over the next few quarters?

Speaker 2

Yes. So I think, 1st and foremost, cancellations on ADI are very, very low. They're very muted. Customers, we've been very equitable in terms of how we have moved our supply Across the markets, across the geographies, across the customer sizes. And I think that's got us in very, very good stead.

Speaker 2

So my sense is We have because of the equitable distribution of our goods, so to speak, we've got a better, more True read on demand, and I think what we're shipping reflects what is true demand. I think better than most, I believe, based on feedback I'm getting from customers. So I think those are the facts Cancellation is low, equitable distribution of goods. And we don't see any Our backlog is still actually during the last quarter increased. So demand continues to remain strong.

Speaker 3

Yes. Just the numbers Well, the book to bill is above 1 in the second quarter and that was again by all end markets and geographies. Because of that, the backlog continued to grow. You asked specifically about China. So real quickly, that's about 20% of our revenue.

Speaker 3

And The lockdowns had some impact on customer production, but was it was really more severe around logistics and the supply chains Related to the Greater Shanghai area, our China revenue was up quarter over quarter and year over year and no notable impact Again, cancellation is normal and as I mentioned book to bill above 1 for China. So when our guide reflects that most customers are Operating at relatively normal levels and we consider this dynamic. So we think that at least for the Q3, it's going to be a negligible impact.

Speaker 2

Just to add a little bit of color. Also, we have no internal manufacturing operations in China. And From a logistics standpoint as well, we have very, very modest operations also in China.

Speaker 1

Thank you, Bill. We'll go to our last question, please.

Operator

Our last question is from Toshiya Hari with Goldman Sachs. Your line is open. Once again, Toshiya Hari, your line is now open.

Speaker 3

Toshi, are you on? Okay, Toshi, maybe on mute. Do we have one more in the queue? Do one more in the queue.

Operator

Sure. Our next question is from Gary Mobley with Wells Fargo Securities. Your line is open.

Speaker 9

Hey, guys. Thanks for taking my question. I wanted to ask a follow-up question on backlog. I think you mentioned that Based on the backlog and adding incremental supply, your expectation is for sequential revenue growth for at least maybe the next few quarters, maybe 3, maybe 4 quarters. Wondering to what extent have you stress test your backlog to see, I guess, under the most bearish of circumstances, How that may trend if perhaps we see further deterioration in

Speaker 3

the economic backdrop and whatnot? Yes. Gary, a fair question. As Vince mentioned, we look at a number of external indicators. So We are mindful of what's happening in the macro environment.

Speaker 3

But as he mentioned, the conversations that he has with our customers continue to support Their need for our products and that we are attached to the right secular driver. So I do want to clarify, you had said sequential Growth for the next 3 to 4 quarters, I can't see out that far, Gary. I feel good about the next 2 to 3 quarters Sequential growth, but I'm not sure I want to go out further than that at this point. All right. Thank you.

Speaker 1

Thanks, Gary, and thanks everyone for joining us this morning. A copy of the transcript will be available on our website. Thanks again for joining the call your continued interest in Analog Devices.

Operator

This concludes today's Analog Devices conference call. You may now disconnect.

Powered by Quartr
Earnings Conference Call
Analog Devices Q2 2022
00:00 / 00:00