Analog Devices, Inc. (ADI)

F3Q2010 Earnings Call Transcript

August 17, 2010 5:00 pm ET

Executives

Mindy Kohl – Director of IR

Jerry Fishman – President and CEO

Dave Zinsner – VP, Finance and CFO

Vincent Roche – VP, Strategic Market Segments Group

Robbie McAdam – VP, Core Products and Technologies Group

Analysts

Jim Covello – Goldman Sachs

Craig Ellis – Caris & Company

Ross Seymore – Deutsche Bank

Uche Orji – UBS

Terence Whalen – Citi

Steve Smigie – Raymond James

Shawn Webster – Macquarie Securities

David Wong – Wells Fargo

Chris Danely – J.P. Morgan

Stacy Rasgon – Sanford Bernstein

Mark Lipacis – Morgan Stanley

Presentation

Operator

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Good afternoon. My name is Courtney, and I will be your conference facilitator. At this time, I would like to welcome everyone to the Analog Devices fiscal third quarter 2010 earnings conference call. All lines have been placed on mute to prevent any background noise. After the opening remarks, there will be a question-and-answer period with our analyst participants. (Operator Instructions).

Thank you. Ms. Kohl, you may begin your conference.

Mindy Kohl

Thanks, Courtney, and good afternoon, everyone. This is Mindy Kohl, Director of Investor Relations. We appreciate you joining us for today's call. If you haven't yet seen our third quarter fiscal 2010 release, you can access it by visiting our website at www.analog.com, and clicking on the headline on the homepage.

This conference call is also being webcast live. From analog.com, select Investor Relations, and follow the instructions shown next to the microphone icon. A recording of this conference call will be available today within about two hours of this call's completion, and will remain available via telephone playback for one week. This webcast will also be archived on our IR website.

Participating in today's call are Jerry Fishman, President and CEO; Dave Zinsner, Vice President of Finance and CFO; Robbie McAdam, Vice President of Core Products and Technologies; and Vincent Roche, Vice President of Strategic Market Segments and Worldwide Sales. We have invited Robbie and Vince who happen to be in the Boston area today to join the call to answer any questions you might on their specific areas of focus.

During the first part of the call, Jerry and Dave will present our third quarter results, as well as our short-term outlook. The remainder of the time will be devoted to answering questions from our analyst participants.

We have updated the schedules on our IR website, which includes the historical quarterly and annual summary of P&Ls for continuing operations, as well as historical quarterly and annual information for product revenues from continuing operations by end market and product type.

Last, I would ask you to please note that the information we are about to discuss includes forward-looking statements, which include risks and uncertainties. Our actual results could differ materially from those we will be discussing. Factors that could contribute to such differences include, but are not limited to those described in our SEC filings, including our most recent Quarterly Report on Form 10-Q.

The forward-looking information that is provided in this call represents our outlook as of today, and we do not undertake any obligation to update the forward-looking statements made by us. Subsequent events and developments may cause our outlook to change. Therefore, this conference call will include time-sensitive information that may be accurate only as of the date of the live broadcast, which is August 17th, 2010.

With that, let's begin with opening remarks from our CEO, Jerry Fishman.

Jerry Fishman

Well, thanks, Mindy, and thanks to everybody for joining us today on the third quarter results call. Business conditions at ADI continued to strengthen during the third quarter. Revenues for the third quarter grew 8% sequentially and 46% year-over-year to approximately $720 million as we experienced strong demand across virtually every market we serve and also in every geography.

Gross margins and operating margins were both at record levels and were well above the levels that we planned for the quarter, primarily as a result of strong growth, a favorable product mix, lower manufacturing costs, and continuing very tight operating expense control.

Overall, we are making very good progress on continuing to focus ADI and in fundamentally improving our business model. Given the strength of current demand, we are planning for Q4 to be another quarter of growth, of increasing profits, and a very strong cash flow. Clearly, we continue to closely monitor and closely analyze our customers' demand patterns to better understand the current order rates.

Overall, our sense is that some product shortages from some of our competitors are causing some customers to reduce their orders on ADI to some degree. But for the most part, our customers are reporting that their inventories are being well controlled relative to the demand they were experiencing from their end customers.

In addition, there are very important macro trends in the industrial market, communications market, the automotive market, the healthcare market that are generating very strong growth opportunities for ADI, which are currently boosting our revenues. I will comment a little bit in more detail about some of these trends right after Dave reviews the financials for the quarter.

In the short term, we are planning to build what our customers are telling us they need. We are planning to keep our lead times short, we are planning to keep tight control over our costs and to carefully monitor order rates for any inflection points in the future. It's important to note as we look at it that our current revenue levels are right on the curve of our long-term growth rates, if you eliminate the volatility of 2009 and 2010.

We have also significantly increased the percentage of our operating expenses that are variable with sales and profits, which affords us considerable downside protection if the market does turn negative.

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