Good morning, and welcome to the Analog Devices Third [sic] [Fourth] Quarter Fiscal Year 2020 Earnings Conference Call, which is being audio webcast via telephone and over the web. I'd now like to introduce your host for today's call, Mr. Michael Lucarelli, Senior Director of Investor Relations. Sir, the floor is yours.

Thank you, Cheryl, and good morning, everybody. Thanks for joining our fourth quarter and fiscal 2020 conference call. With me on the call today are ADI's CEO, Vincent Roche; and ADI's CFO, Prashanth Mahendra-Rajah. For anyone who missed the release, you can find it and relating financial schedules at investor.analog.com. Now on to disclosures. The information we're about to discuss includes forward-looking statements, including statements relating to our objectives, outlook and the proposed Maxim transaction. These forward-looking statements are subject to certain risks and uncertainties, as further described in our earnings release, our most recent 10-K and other periodic reports and materials filed with the SEC. Actual results could differ materially from these forward-looking - this forward-looking information as these statements reflect our expectations only 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. When comparing our results to our historical performance, special items are also excluded from prior periods. Reconciliations of these non-GAAP measures to their most directly comparable GAAP measures and additional information about our non-GAAP measures are included in today's earnings release. Okay. With that, I'll turn it over to ADI's CEO, Vincent Roche. Vince?

Thank you, Mike, and good morning to you all. I hope that you and your families are healthy and safe at this time. So 2020 represents a year of strategic progress for ADI in a very highly uncertain macroeconomic environment. Fortunately, ADI was already operating from a position of strength. Over the last decade, we've created a structurally more profitable business. We realigned our portfolio to target more durable end markets and become more diverse across customers, products and applications. During this past year and at the height of the pandemic, this business model proved quite resilient with gross and operating margins troughing at 68% and 37%, respectively, levels we previously considered peak. It's this resiliency that enables us to sustain a healthy of – level of investment against any economic backdrop. We’ve also been not afraid to make strategic pivots towards the most attractive investment opportunities that enhance our customer engagement and better align us to secular growth trends, such as digital healthcare. Clearly, the biggest investment decision of 2020 was our strategic combination with Maxim, which will further extend the scale and scope of our semiconductor portfolio. And I'll expand on this in a while. As I reflect on the immediate challenges of our current environment, we believe there is more ADI can do to leverage our expertise to engineer a more sustainable future and make an even more positive impact on the world. To that end, earlier this year, we published our first Corporate Responsibility Report and launched the semiconductor industry's first green bond. We also took action in the global fight against COVID-19. We prioritized production of our healthcare solutions to support customers and we're partnering with hospitals and biotech startups to develop solutions that leverage our technology. And our impact has extended beyond our own…

Thank you, Vince. Good morning, everyone. Let me add my welcome to our year-end earnings call. As usual, except for revenue and non-op expenses, my comments on the P&L and our outlook will be on a non-GAAP or adjusted basis, which exclude special items outlined in today's press release. Let me start with a brief recap of 2020. The heightened uncertainty and significant disruption due to the pandemic certainly created a very volatile year. Revenue of $5.6 billion was down 6% year-over-year. However, we saw sequential improvement throughout the year and our revenue was up 14% in the second-half compared to the first. Gross margins finished at 69%, down slightly year-over-year, but we enter 2021 within our long-term financial model. Op margins landed at 40%, as we prudently managed our discretionary spend. All told, full-year adjusted EPS was $4.91. Now turning to the fourth quarter. Revenue of $1.53 billion was up 5% sequentially, marking the third consecutive quarter of growth. This exceeded the high-end of our outlook, driven mainly by stronger-than-anticipated growth in automotive. And if we look at the individual segments, in the fourth quarter, industrial, which represented 53% of revenue, was up 5% sequentially and up 9% year-over-year. We saw growth across nearly all our major applications, notably automation, which makes up approximately 20% of industrial, grew for the first time in two years. For the year, industrial revenue was about flat, underscoring the diversification across customers and applications in this business. In the fourth quarter, communications, which represented 20% of revenue, was down 14% sequentially. However, the segment was up 19% year-over-year, driven by double-digit growth in both wireless and wireline. Importantly, our growth was not aided by customer pull-in activity related to geopolitical tensions. And for the year, communications revenue was down 8% year-over-year. However, excluding…

Thanks, Prashanth. Let's get to our Q&A session. We ask that you limit yourself to one question in order to allow time for additional participants on the call this morning. If you have a follow-up question, please re-queue and we will take your question if time allows. With that, can we have our first question, please?

[Operator Instructions] And our first question comes from Vivek Arya from Bank of America. Please go ahead. Your line is open.

Thanks for taking my question, and congratulations on the strong execution, especially the free cash flow generation. Vince, my question is on the demand environment, both near-term and what do you sense for the next calendar year? So in the near-term, which end markets do you feel are back to normal levels, which are below trend line? Because when I look at your January outlook, up 15% or so year-on-year, obviously, against some easier comps. You're certainly starting the year on a very strong note. But just how should we think about the overall year in terms of the puts and takes for the different end markets in industrial, auto, comms and consumer? Any broad color just near-term and then for calendar 2021, I think, it would be really helpful to help kind of frame our models for your forecast? Thank you.

Sure. Thanks for your question, Vivek. I would say, clearly, as you said, overall demand is better. And I think as well, there is a very good balance between supply and demand. Inventories are, I'd say, very, very well balanced with our customers as best we can tell. Right now, we are seeing very strong trends in automotive and industrial, while we expected comms a little softer after a big first-half of 2020. But overall, I believe 2021, I think I said in the last call is going to be a solid growth year for ADI and for the industry. And my conviction has become even stronger since the last earnings call here. Let me try and unpack things little for you. If I go through a couple of the market segments, industrial, we've clearly seen a broadening of demand. And if you look at 2020, the first-half was clearly about healthcare, aerospace and defense and automatic test equipment, strength in those areas and that strength has persisted, I think, persisted in the second-half of the year. And I think the second-half actually saw good strength emerge in factory automation, process automation, they are more horizontal businesses for ADI. So, we believe that, that strength will continue into the first quarter and beyond. Automotive, as you will have seen, we had a strong upsurge there as well and the business, in fact, is now back to pre-COVID levels. And bookings continue to remain strong in that area. And if I look at just the sub-segments within to give you a little bit of color, electrification is strong, so are BMS solutions, where we're on the fifth generation of BMS product solutions, are doing particularly well. And our infotainment business, which is - which has emerged beyond high fidelity rendering of…

Thanks, Vivek.

Thank you.

We'll go to next question.

Thank you. And our next question comes from Tore Svanberg from Stifel. Please go ahead. Your line is open.

Yes. Thank you, and congratulations on the results. Vince, I was hoping you could zoom in a little bit more on comms and on 5G. You talked about O-RAN. Obviously, ADI has a very flexible approach with the software-defined radio. I was just hoping you could talk a little bit about how that architecture plays into the role of O-RAN and just maybe some more comments on 5G generally? Thank you.

Yes. So if I look at what's happening in the business, maybe I'll take a shorter-term view than the slightly longer-term view and address your question on O-RAN as well, Tore. So, what we're seeing is that in the business in general, as I said in the answer to the last question there, comms in general for us has seen strength in both wireless and wired technologies, optical wired, particularly in the wired area. And what we're seeing is obviously more aggressive deployments of these massive MIMO-based systems, where our channel count continues to increase, which gives ADI a lot more content for radio. And I would also say that our portfolio has never been stronger given the investments we've been making up for several years. And our customer share has never been higher with the key OEMs far more balanced in terms of the span of technologies and products that we're supplying. So, I think it's important to remember 5G is at the early stages of multi-year, probably a decade of ramp here. And I think 2021 will be characterized by the deployments of 5G more globally beyond China. I expect America to be the primary driver probably towards the second-half of 2021 for 5G. And we've also - we've seen a lot of interest in our technologies for O-RAN. We're working with ecosystem partners in that area. You will have seen. Also the first announcement we've had publicly about the use of our technologies - our radio technologies with Rakuten Mobile in Japan through our partnership with NEC. So, I think it's classical 5G being deployed for consumer applications will continue rapidly over the next three years. But I'm also beginning to see now the early stages of adoption of 5G into more deterministically critical applications like healthcare, factory automation and so on and so forth. So, I think if you look over the long-term, Tore, this is going to continue to be a growth market for ADI with more content. We've got a stronger position with our customers and we continue to push the boundaries of technology here to enable our customers to simply now to deal with the complexity, that's increasing exponentially and the more rapid innovation cycles with our software-defined radio systems.

Thank you.

Thanks, Tore. We'll go to next question, please.

Our next question comes from John Pitzer from Credit Suisse. Your line is open.

Congratulations on solid results. Thanks for letting me ask the question. A modeling question for Prashanth. Prashanth, if you look at the quarter just reported, the October quarter, incremental op margins were perhaps lower than I would have expected. I'm assuming that's variable comp coming back into the model as you guys continue to do better on the top line. But I'd be curious as you look into the January quarter, how we should be thinking about OpEx just given how funky a year, calendar year '20 was because COVID had both some puts and some takes on the OpEx and expense line?

Yes. Thank you for the question, John. So let me handle that in two pieces. Let's talk gross margins and then OpEx. So for the quarter just passed, 70% gross margins, we had pretty considerable upside from automotive. And so we have some mix headwind with that kind of explosive growth in automotive. It's below the corporate average in terms of margins. As we think about gross margins for the coming quarter - for the first quarter, we are passing through the holiday period. So, we're going to have a little bit of continued pressure on utilization, as we have some of our - some of our fabs will be shut down for the holiday period. But we expect that to improve as the year progresses and we bring in the remaining $50 million of cost reductions from the shutdown of the two LTC facilities in the balance of 2021. On the OpEx side, you're exactly right. We've designed our variable comp system to really act as a shock absorber, as a flywheel. So in 2020 when we had the great deal of uncertainty, that operated the way it should and it unwound. In addition, we made a decision as a leadership team to delay implementing merit in 2020. And we brought that back into place just this past quarter. So, you will see headwind from those - from both of those decisions into the first quarter and I've mentioned that in my guide. So it's both - in my prepared remarks, it's both, a full quarter of merit and better variable compensation.

Thanks, John. Cheryl, we'll go to our next question.

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

Vince, I wanted to zoom in on the industrial business. This business has been a really resilient compared to the past cycles for yourself, as well as your larger peers. So the question really is, can you just help us understand - and you gave us a number, 20%, for automation. But if you help us understand the various segments that are contributing to how you're able to kind of cloud through what we have seen a pretty disastrous 1Q, 2Q? And then with Maxim, we all understand the complementary parts or the additive parts on the automotive. Can you just help us understand how does the industrial business benefit from the Maxim business that you'll be bolting on? Thank you.

Yes. So, thanks Ambrish. First and foremost, it's still a fairly tricky time in terms of trying to predict GDP. But we've come out of the year with tremendous strength. First-half of the year for ADI was about aerospace and defense, healthcare and the automatic test equipment sector as well. So - and that's continued, by the way, through the second-half. And then, we're building upon that in the - with the upsurge, the second-half is the expansion of growth in factory automation, which is, particularly in the fourth quarter, we began to see a very, very good surge, which we expect to continue by the way, albeit of, I'll say, somewhat depressed base as economic expansion really takes roof, I believe, in 2021. So - and also, this business for ADI, industrial is more than half of the company's revenue. The crop of products out there is stronger than it has ever been in the history of the company. Our focus - a decade ago, we decided this was really the roof of the company and we're beginning to really see, demonstrated in our results versus our competition and we're gaining market share, I think that's important to note. So, we cover more customers with more market share, with better product portfolio. So with Industry 4.0 coming on board, healthcare moving towards digitalization, telemedicine, these all bode really well for ADI for the long term. And where does Maxim add value to it as well? Industrial actually is - is really about - is primarily about precision signal processing and power management. And Maxim brings a long heritage in those two areas, which we will deploy to even greater effect across the spectrum of sensor to cloud, the raw signal that are sensing the signal, capture signal processing, connectivity. And that bodes very well for ADI. So, I'm excited about getting more capabilities to bring to more customers. As they require ADI to sell bigger swaths of problems, the complexity is growing in terms of their needs. The analog scale is becoming scarcer and scarcer. So, we will bring more of that skill to bear to solve more problems in a more complete way for our customers. So, I think that's the way to think about it, Ambrish.

Thanks, Ambrish. Go to our next question, please, Cheryl.

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

Thank you for taking the question. Another question on the industrial side, Vince. The business is growing 9% year-on-year in October, yet over the last few years is essentially flat. And so curious, it sounds like automation growing for the first time in two years is a real positive signal. So would kind of love to hear your thoughts on, as we come out of this pandemic, what that business segment growth could look like considering some of the growth factors that you're investing in like healthcare, as well as perhaps some of the more tried-and-true machinery, typical industrial business is beginning to recover? Thank you.

Yes. So if I look - thanks, C.J. If you look out over the longer term, so industrial automation has been really on its way down for the last two years, two and a half years. And some of that was driven by the trade tensions. Obviously, with the automotive sector way off in, I mean, SAAR was dropping anyway in 2019, the pandemic crush demand there even more so in 2020. So, automotive is a big, big consumer of sophisticated factory automation systems. So that's all improving. If I think about the long-term prospects for the business given the vectors, the market vectors, the technology vectors that we've got, my sense is if you think over the longer-term here and integrate the demand over three-year, five-year period, my sense is this business can grow in the mid-to-high single digit level for ADI.

Thanks, C.J. Go to next question, please.

Our next question comes from Toshiya Hari from Goldman Sachs. Your line is open.

Vince, I wanted to follow up on the automotive business, both in terms of your Q4 performance as well as the outlook into fiscal year '21. Just as sort of a clarification on Q4, you guys grew 40%, 40% plus sequentially. I think you were guiding that business to be up in the low teens. So obviously, a very big beat in the quarter. Was that essentially a function of higher volume across your customers and therefore, a beat across most of your customers and most of your applications? Or were there any specific standouts in the quarter? I guess more importantly, into fiscal year '21, when you think about your automotive business and the potential for growth there versus the rate of recovery in the overall global automotive industry, what kind of outperformance would you expect on top of automotive production? It appears as though you guys talk about BMS and active noise cancellation, in particular, but are there any specific drivers that you're most excited about? Thank you.

So let me try and unpack that for you. So yes, in fourth quarter, we were up 2% year-over-year. And actually, we had strength across all the applications. But even though our battery management solutions were down year-on-year, we did better than the overall market at large. And our position has gained strength with the new offerings that we have and the sheer performance that we bring that nobody else can match in terms of the sensing and the single processing. So, I think that, just looking at the prognostications of what electrification will do in the electric vehicle area, I think that's a growth trend for decade, decade and a half, two decades. So, we feel good about that given our position. I think also if you just look at the fourth quarter, I talked previously about our signal processing platform, high performance signal processing platform based on our DSP, our A2B technology road noise cancellation. A2B alone was up 70% in the year. So, we've been talking about it a long time. But now the revenues are really coming home to roost in that area. If I look at 1Q, typically, the automotive business for ADI is down seasonally, but we believe that it will be up. So the strength that we've been seeing coming through the fourth quarter here will continue into the first and beyond. And if I look at just the areas that I feel really enthusiastic about that we've been steering investment increasingly towards over the last three years or so, I talked already about the electric vehicle market. And we think about that as an opportunity from battery formation to battery deployment and battery discharge. So, we're growing share in those key markets and we continue to innovate in the space and create more blue sky between ourselves and our competition, as the problems that our customers are solving become more and more challenging. So, we've brought wireless BMS quite recently, which we've announced a partnership with GM. But that is only the start. That is a new growth dimension for ADI in the automotive sector. I've talked about infotainment already, A2B, road noise cancellation. And we've managed to grow that business in 2020 despite the really, really compressor. The other thing I should point out is that we're still in the early innings of attaching our power franchise in the automotive of critical applications in which we play and that's all still ahead of us. Again, we feel good about that in areas like safety, the radar, as well as vision-based safety systems. And just in the car in general, power is an area where we've made excellent progress, I think, getting design ends. Now, we're turning them to revenue.

Good. Next question, please?

Our next question comes from Blayne Curtis from Barclays. Please go ahead. Your line is open.

I just want to revisit answer. On the comm, you talked about longer term drivers like O-RAN. I'm just kind of curious. In the January, I think there is going to be a pause between Phase 1 Phase 2 in China. I'm just kind of curious on your perspective. Seems like it might be down a little bit in January. Just curious, when do you think comm could see a recovery in any perspective and timing of China coming back?

Yes. I think comms is down sequentially. I mean, a big reason why comms was down sequentially in 1Q is the Huawei ban. Huawei was a low single-digit customer, call it, 2%, 3% of sales. They're going to be zero. So, that'll be a headwind into our first quarter. And you're right, I think the timing of next run of China 5G deployment are TBD. I think when they do happen, it will be a great business for us and we'll continue to grow in that market. But it's very hard to call when that market will turn back on. Sometime likely in the first-half of '21, but really unsure to pinpoint it today when that's going to be, given all the geopolitical tensions out there. I think, Vince, did a good job talking about how it's not just about China. The good thing, as you moved to '21, it's more global 5G. North America should start ticking off. Europe, Japan, Korea, has really started to broaden out and less about China. China still will be the biggest market, but really global 5G deployment should do better year-on-year in '21.

Can we go to our last question, please?

And our last question comes from Ross Seymore from Deutsche Bank. Please go ahead. Your line is open.

Thanks for sneaking me in. I just wanted to wrap up with a little bit of the linearity of demand. Can you just talk about the bookings that you've seen? Have any of the concerns that your customers have had in the past about supply disruptions and all those sorts of things? It seems like those have gone away, given your commentary on channel inventory. But just wanted to get kind of what your book-to-bill was and how linearity played out through the October quarter, please?

So let me give you a couple of data points here. We started the quarter out strong in August, which was up from July and then we had a pretty normal September. Bookings remain solid so far. I think where - book to bill is at parity, where we're going into the first quarter with very normal backlog coverage for our outlook. All of that is reflected in the guide that we have. I did make a comment about inventory in the channel. So maybe that's also worth making sure people understand that we are below our seven-week to eight-week model and then we're going to kind of build ourselves back into that model over the course of 2021. So, that should also provide a little bit of a - a little bit tailwind as we go through 2021.

All right. Thanks, Ross. And thanks, everyone, for joining us today this morning. A copy of the transcript will be available on our website. And all available reconciliations, any additional information can also be found in the Quarterly Results section of our IR website. Thanks for joining us and your continued interest in Analog Devices. Hope everyone has a good holiday.

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