Analog Devices Inc ADI
Q2 2013 Earnings Call Transcript
Transcript Call Date 05/21/2013

Operator: Good afternoon. My name is Terri, and I will be your conference facilitator. At this time, I would like to welcome everyone to the Analog Devices' Second Quarter Fiscal Year 2013 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After opening remarks, there will be a question-and-answer period with our analyst and investor participants.

Thank you. Mr. Husain, you may begin your conference.

Ali Husain - Director of IR: Great. Thanks, Terri, and good afternoon, everyone. This is Ali Husain, Director of Investor Relations. If listeners haven't yet seen our second quarter 2013 press release or our Form 10-Q, they can be found on ADI's IR website at This conference call can also be accessed from the same page. A recording of this conference call will be available within two hours of this call's completion. It will remain available via telephone playback for two weeks and it will also be archived on our Investor Relations website.

We've also updated the financial schedules on our IR website, which include the historical quarterly and annual summary P&Ls for continuing operations as well as for revenue from continuing operations by end market and product type.

Participating with me in today's call are Vincent Roche, ADI's President and CEO; and Dave Zinsner, Vice President of Finance and CFO and Maria Tagliaferro, Director of Corporate Communications. During the first part of the call Vince and Dave will present our second quarter 2013 results, as well as our short-term outlook. The second part of our call will be devoted to answering questions from our analysts and investor participants.

During today's call, we may refer to non-GAAP financial measures that have been adjusted for certain non-recurring items in order to provide investors with useful information regarding our results. We've included reconciliations of these non-GAAP measures to their most directly comparable GAAP measures in today's earnings release, which is posted on the IR website.

I'd ask you to please note that the information we are about to discuss includes forward-looking statements, intended to qualify for the Safe Harbor from liabilities established by the Private Securities Litigation Reform Act of 1995. These forward-looking statements include risks and uncertainties and 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 filed earlier today.

The forward-looking information that's provided on 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 May 21, 2013.

So, with that, I'll turn the call over to Vincent Roche, ADI's President and CEO, for opening remarks.

Vincent Roche - President and CEO: Thanks, Ali and hello, everyone. Thank you for joining our call today. Before we talk about our operating results and the outlook for the coming quarter, it is true to say that a lot has happened since our last earnings call at the end of February. Many of you sent deep condolences upon learning of Jerry Fishman's sudden passing and we thank you very much for those. I worked with Jerry for many years and well of course we all miss him greatly on a personal level, David and I along with our senior management team and the many talented employees at ADI will continue to do great things together.

Our employees are engaged, our customers are (liking) us more and more as a preferred partner and the market opportunities for us are vast. Our business policies remain the same, leadership innovation in our core signal processing technologies, continuously assessing where we play, how we win and aligning our resources accordingly and emphasizing strong profitability as a measure of the quality and sustainability of our innovation. We believe that our operating performance supplemented with cash dividends and share repurchases will continue to drive strong returns for shareholders.

As you've seen from our press release, our results for the second quarter were solid. So let's take a look at what actually happened in more detail. Revenue totaled $659 million, up 6% from the previous quarter and down 2% from the same period a year ago. Diluted earnings per share excluding special items, was $0.52, up 18% from previous quarter. Both results were at the midpoint of the guidance we had provided.

By end market, the revenue growth this quarter was led by industrial and automotive customers. Our industrial end markets which are typically strong in the second quarter grew 11% sequentially and made up 47% of our sales. The increase was broad-based across all regions and all major application areas within that segment but was particularly strong in instrumentation and industrial automation applications.

A significant portion of our industrial revenue is serviced through our distribution partners and during the second quarter, order momentum through the channel was strong and higher than in the prior quarter. It appears that orders and shipments were in good equilibrium as inventory in the channel remained low. But while we cannot predict with certainty regarding the short-term, these order trends and low inventory levels are positive signs for our industrial business.

Longer-term, we're driving innovation to higher levels to ensure that ADI increases our share of the industrial market. Over the past few years, we have been focusing more of our investments toward industrial applications, where mechanical and electromechanical systems are increasingly integrating electronics to provide intelligent sensing and control connectivity and energy efficiency, which are all the things that we believe will drive growth for this broad and diverse market over the long-term.

In the automotive sector, revenue increased 14% sequentially, and 3% year-over-year, reflecting strength in North America and China for the auto sector, growth in worldwide luxury vehicle sales where ADI is especially well represented. This end market was 19% of our total revenue in the second quarter.

Sales increased sequentially across our focused applications and powertrain, infotainment and safety with particular strength in active safety, advanced driver assistance systems. These systems are seeing accelerating adoption rates, not only in premium vehicles but also in mainstream vehicles as these new safety features become standard equipment, whether due to consumer demand or indeed government mandates.

We also experienced strong growth from start/stop powertrain applications for internal combustion engines and also battery control for hybrid electric vehicles. These features improved fuel efficiency and reduced carbon emissions, and are also driven by growing consumer demand and government mandates. The automotive industry premium brands are the drivers of innovation and these are the brands that have adopted our MEMS Gyroscopes, Accelerometers, Converters, RF and other analog and BSP technologies.

We continue to distinguish ADI as an innovation partner and a high quality supplier with industry leading reliability ratings. As electronic content in vehicles continues to grow ADI is well positioned as demonstrated by our results over the last five years, with our automotive business growing at a 16% CAGR, while vehicle unit growth averaged a 3% CAGR over that period. In communications infrastructure sales were down 2%, after being down 12% in the prior quarter and this business represented 19% of our total sales in the second quarter.

Communications networks both wireless and wired are transitioning to – and these transitions present a strong long-term opportunity for ADI's broadband radio, optical and cable infrastructure technology.

In wireless infrastructure, a major transition everyone is watching is from 3G to 4G and TD-LTE. In wired infrastructure, new equipment with higher levels of throughput such as 40 and 100 gigabit optical, and emerging standards such as cable DOCSIS 3.1 will from the core, metro and edge networks in the future and create growth opportunities for ADI, but as our results in the last two quarters have shown, we are in the early stages of these transitions.

For example, a transition to a new wireless standard happens in a couple of phases, initially carrier capital spending is focused on coverage, more so than capacity and subscribers upgrade their devices and their service agreements, but the need for increased capacity soon becomes clear as networks become overloaded and carriers find it difficult to deliver significantly higher data rates and increased capacity with their existing equipment.

Increasing capacity is highly dependent on high bandwidth, spectrum efficiency and network identification where ADI's configurable wide band radio technology brings significant competitive advantages for our customers and in turn for the carriers.

Now, in wired applications, our focus is primarily the design challenge around signal integrity, as well as the data path, transmit and receive. Our interface clock and data recovery and power management solutions are used to control and monitor signal propagation and optical and cable infrastructure which are being upgraded to support 40-gig plus speeds. Finally the consumer business was 15% of sales in the second quarter which was down from 17% of sales in the prior quarter. We saw sequential growth in line with improving seasonality and the applications for ADI's technology has been well established over many generations, such as digital imaging and prosumer audio/video applications.

Portable devices declined sequentially but were up significantly year-over-year in line with customer's new product cycles. As we have mentioned before, there are many good opportunities ahead in portable devices and consumer audio and imaging for ADI. We continue to be highly selective in our engagements, focusing on applications for customers' value our innovation and pursuing engineering challenges where we can leverage our existing core technologies and make a demonstrable difference to the user experience.

So with that I will turn it over to Dave, who will now take you through some of the details of our financial results.

David A. Zinsner - VP, Finance and CFO: Thanks, Vince and good afternoon, everyone. As Vince mentioned second quarter revenue increased 6% sequentially and declined 2% year-over-year to $659 million. Our gross margin was 64% in the second quarter. This was up from 62.7% in the first quarter due to higher factory utilization and lower manufacturing costs. As has been the case now for several quarters we again carefully managed production levels in our facilities.

Utilization increased from the mid-50s in the first quarter to approximately 60% in the second quarter, while our inventory declined on our balance sheet by $8 million. Inventory on our balance sheet on a dollars basis is now at its lowest level in five quarters.

On a days basis, inventory was down from 121 days in the prior quarter to 115 days in the second quarter in good position relative to our model. Our plan is to increase utilization in the third quarter to the low-60s. This should keep our days of inventory approximately flat to second quarter levels. Inventory distribution on a dollars basis was approximately flat in the second quarter compared to the prior quarter, but inventory distribution on a days basis was lower than the prior quarter by about half a week at 7.5 weeks.

Lead times for our direct OEM customers remained similar to last quarter, and are in good control with virtually all of our shipments to OEMs occurring within four weeks. Total end customer orders, which include both OEM and distribution increased in the second quarter compared to the first quarter and our book-to-bill was slightly above one.

On a regional basis, orders improved across all regions with particular strengths in North America and Europe. (Our world) order patterns improved throughout the quarter. Regarding operating expenses, we recorded approximately $6 million of additional expense in the second quarter related to the one-time accelerated investing of stock-based compensation. Excluding this special item, operating expenses were $224.5 million compared to about $223 million in the prior quarter, which as a percent of revenue is a 170 basis point improvement. We continue to be very watchful of operating expenses and plan on reducing operating expense ratios by constraining expense growth to rates that are less than our sales growth rates in the coming quarters.

Operating profit before tax for the second quarter excluding this one-time expense were $197.7 million or 30% of sales. This was about 300 basis points higher than the prior quarter's operating profits of 26.9% of sales, excluding a special charge in that quarter. Other expenses of $3.7 million in the second quarter, was flat to the first quarter and reflects the ongoing run rate of our net interest expense at current debt levels. Our second quarter tax rate was 16.5% excluding one-time items and we expect our tax rate to be at that level for the next two quarters.

Diluted earnings per share of $0.52 excluding special items, was at the midpoint of our guidance. Cash flow in the second quarter continued to be very strong. We generated 38% of our revenue, or $252 million in operating cash flow. CapEx was $26 million, resulting in free cash flow of $226 million or 34% of revenue.

Our cash and short-term investments balance increased about $185 million during the second quarter and now stands at $4.2 billion with $1.2 billion available domestically.

At the end of the second quarter, we had approximately $760 million in debt outstanding. Our accounts receivable balance was up $4 million versus the last quarter, and higher overall shipments in the quarter and our day sales outstanding decreased to 46 days from 48 days.

During the second quarter, we returned approximately $109 million or 48% of free cash flow to our shareholders, primarily through cash dividends. On May 20, our Board of Directors declared a cash dividend of $0.34 per outstanding share of common stock, which will be paid on June 11, 2013 to all shareholders of record at the close of business on May 31, 2013. At the current stock price, this dividend represents an annual yield of approximately 3%.

I'm going to take a moment to talk about our long-term shareholder return strategy. Since 2004, we have paid a quarterly dividend and increased it 10 times over that period. In addition, we have repurchased approximately $129 million shares, driving shareholder returns even higher. In total, over that period, we have returned over $6 billion to our shareholders in the form of dividends and share repurchases.

So, over the last three years, we've returned to shareholders an average of approximately 60% of our free cash flow, and what I'd like to say today is that over the next five years, we plan to increase that ratio to average approximately 80% through a program of both increasing dividends and discipline buybacks. Of course, quarter-to-quarter we'll be above or below this, but over the five years, this is our new target.

In summary, the second quarter delivered good results for ADI. Our operating model turned a 6% sequential increase in revenue into an 18% sequential increase in diluted EPS at relatively low levels of utilization. We have plenty of leverage ahead as sales increase factory utilization improves from its current low-levels and we continue to tightly control operating expenses.

So now, I'll turn the call back over to Vince, who will discuss ADI's outlook for the third quarter.

Vincent Roche - President and CEO: Thanks, Dave. Our lead times continue to be short, which limits our visibility somewhat and as you know the world economy remains uncertain. In addition, the last month of our third fiscal quarter is the July month, which can sometimes be weaker, due to summer shutdowns. Having said that order momentum is positive and if this positive momentum continues, we are likely to see sequential revenue growth in the third quarter, which could be we believe as much as 4%.

However, if the macro economy weakens we could be approximately flat. Therefore we are planning for revenue to be in the range of $655 million to $685 million, the midpoint of this range would be in line with the average third quarter growth rate we have seen over the last five years.

By end market we expect our communications, automotive and consumer businesses to remain approximately flat to second quarter levels. We are planning for our industrial business to grow sequentially given low channel inventory and good end customer order rates. We are forecasting gross margins to increase approximately 50 basis points from the 64% we achieved in the second quarter. Our factory utilization is planned to be higher in the third quarter, it will still be quite low. Yet if we achieve the midpoint of our revenue guidance we will generate more than 90% gross margin drop through on incremental sales.

Our plan is for operating expenses to be approximately $226 million a slight increase from the prior quarter primarily as a result of a full quarter with the annual salary increases that went into effect in April. Based on these estimates and excluding any one-time items, diluted earnings are planned to be in the range of $0.51 to $0.56 in the third quarter.

So in conclusion we see momentum, order rates (indiscernible) and inventories are low. We are well positioned to expand margins as factory loading increases and expenses remain under tight control. Also to continue generating strong earnings leverage and strong free cash flow which as Dave discussed earlier we will use to further improve shareholder returns.

Ali Husain - Director of IR: Thanks, Vince. During today’s Q&A period please limit yourself to one primary question and one follow-on question. So, with that operator, we are now ready for questions from tonight's participants.

Transcript Call Date 05/21/2013

Operator: Jim Covello, Goldman Sachs.

James Covello - Goldman Sachs: Guys, is there anything notable about linearity of orders in the quarter and is there any difference in segment relative to that linearity?

David A. Zinsner - VP, Finance and CFO: Actually I think I even mentioned in the prepared remarks. Actually the orders strengthened through the quarter. So that was obviously a positive sign. Clearly industrial was stronger than the others which is why in Vince's outlook, he suggested that that one had the best likelihood of being up in the third quarter.

Vincent Roche - President and CEO: Yes. We've also seen a little momentum in the latter part of the quarter in the communications infrastructure segment. So coupled with the industrial area, they were the two sectors that produced the most momentum through the quarter, particularly in the latter part as Dave said.

James Covello - Goldman Sachs: Then any turns assumptions, differences relative to previous quarters or similar kind of turns being assumed to get to the midpoint of the guidance?

David A. Zinsner - VP, Finance and CFO: Well, Jim, I think I've mentioned probably every quarter since I've been here; it's tough to use the turns calculation in that, backlog includes orders from the distributors on us and the revenue isn’t necessarily the same as it's shipped through to the end customer. But having said that, we're in a very short lead time environment, we've been in this lead time environment for many quarters now. I'd expect that the turns will be pretty similar to what they were in prior quarters.

Operator: Terence Whalen, Citi.

Terence Whalen - Citigroup: I wanted to drill into your capital return target a little bit more clearly, I think you said, 80% is going to be the rate which you target going forward. Can you provide us just your sort of qualitative context for deciding between buyback and dividend yield and in general, what's the appropriate dividend yields or free cash flow payout for ADI?

David A. Zinsner - VP, Finance and CFO: We generally don't look at cash – we generally don't drive the dividend based on yield. We drive dividend based on looking at our earnings and giving out a percentage of those earnings in the form of a dividend. It just so happens that it translates into this 3% yield, although we're mindful of it. It's certainly something that we pay attention to, but it isn't the major driver of how we drive the dividend. Our goal is, dividend is our primary means of returning cash to shareholders. We want it to continue. We want it to grow as earnings grow and we look at the buyback as more of our opportunistic opportunities to enhance the cash going back to shareholders, albeit at different intervals depending on the stock price relative to kind of historical levels. Then, what was the second question Terence? I missed that part.

Terence Whalen - Citigroup: So, I wanted to just understand what the tradeoff was in terms of you thinking about allocating towards dividend, but I think you may have answered that question, if I could actually, ask a different question Dave, as I look at the second half of the fiscal year, also looking in the context of last year, we saw really consumer accelerate quite a bit and really outgrow industrial, I was just wondering for purposes of considering gross margin, as we look at the second half of this year, should we again expect that now there's acceleration in consumer, in the second half?

David A. Zinsner - VP, Finance and CFO: Well, generally, Vince, feel free to chime in, but I think that we would normally expect and we'll just have to kind of wait and see how it goes, that consumer generally has a seasonally strong fourth quarter, and so at this point no reason to expect otherwise, although it's early and we don't have any bookings yet. What we're hoping is that also industrial continues its momentum. Last year, there was a bit of a redirection on the industrial business in the back half of the year, as kind of overall economic sentiment started to deteriorate through the back half of the year and so industrials mix kind of came down, but we're hopeful that this is the start of a recovery and we don't see that, but again, it's early. We'll have to kind of be watchful of both. The good news is that the margins – the gross margin, as that's kind of the lead end of the question, does mix change? I don't think the mix changes too dramatically, because all the margins in all our end markets are actually pretty good, and pretty close to the corporate average. So, regardless of what happens. I think we'll do a pretty good job of seeing gross margin leverage through the back half of the year, assuming conditions continue to be strong.

Vincent Roche - President and CEO: To add a little color to what David said, we're in the transition between 3G and 4G and wireless infrastructure and as that gains pace, we're very well-positioned as a Company with good market share, a lot of good design coverage and extra build materials value in 4G compared to 3G. So, as that starts to gather steam, which we hope is sometime in the second half of the year, albeit, so far the carriers have been fairly skittish, but somewhere we believe in the fourth quarter and to the early part of the coming year we do expect to see the carrier start to accelerate the build out of their networks in terms of capacity rather than coverage. So I think that will help the margin structures and the growth overall for the Company.

Operator: Shawn Webster, Macquarie.

Shawn Webster - Macquarie: Dave, on the new cash flow guidance on the 80% of your free cash flow, can you remind us what your normal domestic operating free cash flow is and can you help us put it together how you get to 80% payout over time? Because I think if I remember correctly that your domestic cash flow is something around a third, so just trying to get some clarity on that.

David A. Zinsner - VP, Finance and CFO: It certainly can be – it's a little bit lumpy. So some quarters it can be as much as 50, some quarters it could be lower than 30. What we have is, we have $1.2 billion or $1.1 billion of cash, we will certainly utilize some of that cash to ramp up the cash flow to shareholders and then on top of that I would expect we would be able to add leverage if necessary to augment the cash we have and the cash flow we are getting from U.S. entity to enable us to get to the 80% level. We have stress tested this level to make sure that under different scenarios based on what happens from an economic perspective over the next five years, we would still be able to achieve the 80%. We feel more than comfortable that we can get there.

Shawn Webster - Macquarie: No change to your longer-term tax outlook in terms of the new spending?

David A. Zinsner - VP, Finance and CFO: No. Yes. This will not influence the tax story.

Shawn Webster - Macquarie: Then just another final one, on the automotive side you had very good growth in Q2, it's flattening out in Q3. What are some of the signals you're seeing as we get into the back half of the year from the automotive end market as it relates to, how you think that's going to evolve for the back half?

Vincent Roche - President and CEO: Yes. I think there's been brisk building of demand in the first and the second quarter. We've seen a little tapering in demand from the automotive customers, and also when we get into the summer period, you very often get just the seasonal vacation cool down. So overall, the long-term growth, we're very, very bullish about. We're very confident about, but in the third quarter, we're just a little cautious based on immediate demand pattern.

Operator: Aashish Rao, Bank of America Merrill Lynch.

Aashish Rao - Bank of America Merrill Lynch: A question on communications, sales have disappointed in the April quarter and you had a couple of quarters of year-on-year growth earlier and it seemed to have turned a corner, but now it's down again year-on-year. So first, what caused the miss in April quarter and second, I would have assumed that the shift in CapEx towards 4G and 3G would have helped offset some of the spending sluggishness. Just wondering, why hasn't that been the case in your comms business for the last two to three years?

Vincent Roche - President and CEO: I think we've had over a five year period up to our fiscal '13 here; we had growth in our wireless business of around 9% compounded. I think what we're seeing is a certain level of caution on the – the CapEx (layered) by the carrier that's for sure. There's been a delay in the rollout of the next-generation of a Chinese system, it's been delayed. Europe, in general I think has been very slow. Our growth has been largely driven by American, our OEMs who sell to the American carriers, that's been quite strong and America's been aggressive in building out the 4G network, but largely again, as I mention in the script, really just building a coverage footprint rather than identifying the network or building a lot more capacity which is going to happen, so we're still reliant very heavily on 3G and I think what we expect to see is 3G will start ramping down over the next 12 months, we expect to see 4G ramp up and at that point, I think we'll be very well positioned to take share, see growth and get back into the high single-digits, low double-digit compounded growth rates. So, I think it's more – certainly, it is how the market is performing rather than our technology. Certainly from a technology standpoint, from a competitive advantage standpoint, we're in better shape than we've ever been. As you know, we've been steering a lot of R&D into building the underlying technologies and the products over the last three or four years and we're starting to see the benefits in terms of designing. So, our engagements are stronger than they've ever been with the key OEMs. So, it really is more about how the market performs than ADI.

David A. Zinsner - VP, Finance and CFO: Aashish, do you have a follow-up question?

Aashish Rao - Bank of America Merrill Lynch: Yeah, the only one would be on automotive. I think you highlighted North America and China as being strong this quarter, and I think some of the European data points have been somewhat weaker, so just any color on what your current exposure is and how you see that changing over the next couple of years?

Vincent Roche - President and CEO: Well, as you know, we're strong in – with all the major players, when it comes to safety, infotainment and powertrain applications, we've tremendous share in all those applications. So, my sense is our business has been largely based on strength geographically in Europe and America over the last five or seven years. We continue to gain share in these regions, but over the last couple of quarters we've had some very good breakthrough as well, in Asia and particularly in Japan. So, one of the things I think we mentioned, we've talked about it various times is that we've been very heavily focused on expanding our reach into Asia and that's beginning to really pay dividend for the Company. So, again, I think it's more about how the market performs than ADI. We're in good position from customer penetration standpoint and the technologies we have are being adopted more and more into the applications that I've outlined here.

Operator: Blayne Curtis, Barclays.

Blayne Curtis - Barclays Capital: I just want to follow-up more on the guidance Vince. It seemed like your commentary – was that the order book was relatively okay, you made some comments on the auto order trends falling off, just more broadly was it just in autos where you saw a little bit weakness and kind of where are you adding the conservatism?

Vincent Roche - President and CEO: Well, we're expecting the third quarter, we're expecting momentum from the industrial business. As I said, up to now, the order patterns have been strong in industrials. That gives us a lot of encouragement, and as long as those order patterns continue, as I said in the script, we believe that revenues in infrastructure, automotive and consumer will be relatively flat in the third quarter. So, I think that the industrial order patterns continue, I would feel bullish about hitting the upper end of the range that we have presented to you today.

Blayne Curtis - Barclays Capital: Then I just wanted to better understand the comments in consumer. It seems like – you mentioned you are trying to be selective and that's understandable given that segment with the gross margin profile and such. Just want to understand that you also said that you expect it to ramp in the back half. You just talked about how you (refreshed) business selection there and that you had a very strong ramp last year, when you say a ramp this year are you talking similar magnitude?

David A. Zinsner - VP, Finance and CFO: I think since I answered it, I guess I have to just answer this one. I don’t want to suggest that we think we have some massive ramp. I mean we are just – in the context of mix, normally consumer has a better fourth quarter and that's all that I would suggest. We are not going to get into guidance really for the fourth quarter because that's what we do in the third quarter.

Vincent Roche - President and CEO: Yes. So when we talk about – we have – I might have explained before, our consumer business has a few different components to it. We have a very horizontal or a very diverse business in areas like broadcast and prosumer as we call it, audio, video, imaging applications. With a more kind of catalog type products that are very diversely used across all the major regions of the world with companies who build broadcast equipment, professional equipment for enterprises and so on. That's a good foundation business for ADI. When we talk about picking our spot carefully we are really referring to the portable areas, all types of equipment, be they tablets or smartphones. We still have a business in the digital camera space. When we talk about being careful, we try to define the end application very carefully from a user standpoint to be able – and we've tried to describe that application over multiple generations so that we can be sure from an application standpoint that we're really delivering value that consumers ultimately will be excited about. So also when you play in the consumer space, obviously the life cycles are very, very short. You've got to be able to play through in over multiple generations and for each application that we play in typically, we have to have a couple of concurrent design teams in play to be able to get the generation sequentially syncing, so that we exit from one generation, but we have the next-generation ready to play straightaway. So it's – there is an extensive place to play from an R&D standpoint, but the returns are great when you pick the applications carefully and get with the right customers.

Operator: William Stein, SunTrust.

William Stein - SunTrust Robinson Humphrey: Thanks for taking my question. It relates to gross profit margin and the contribution margin on the gross line going forward. Can you remind us of the manufacturing strategy in terms of which end markets are more heavily outsourced versus made internally so where we could think about getting operating leverage on the gross line?

David A. Zinsner - VP, Finance and CFO: Yes. There's products manufactured internally that target all end markets. But I would say there's a bias, a slight bias towards the industrial end market. So as the industrial grows, that does utilize the internal facilities a bit more.

William Stein - SunTrust Robinson Humphrey: Then on that I think you answered at least partly before, but I'd like to just dig into it again. It sounds like you're telling us that while automotive was very strong, the order pattern fell off at the end of the quarter and we've also heard of some less robust end market data points and notwithstanding the content growth story that we all understand is going on in semis. I think there's some concern that there's been a lot of strength in particular in the most recent quarter that yourselves and others have demonstrated in this end market, but the OE demand doesn't look as robust. Can you help us understand whether there might be an inventory build going on in that market?

Vincent Roche - President and CEO: Well, I think, the way to look at that market, Europe has been very, very muted from a car sales standpoint, although there are indications that I've seen over the last few weeks that on new car registrations in some of the European countries are starting to pick up again. So, I think it's more about how the geographies are playing out rather than anything underlying in the consumption patterns, demand and consumption patterns. So, my sense is that certainly from our standpoint, I think the inventories are quite lean in that area, the automotive area and it really is more about how the market is behaving at the geographic level than anything else.

Operator: Vijay Rakesh, Sterne Agee.

Vijay Rakesh - Sterne, Agee & Leach, Inc.: Just on the same automotive line, I was wondering – Europe is obviously a big portion for you, 40%, it's been a little slow in the first half, do you see it picking up in the second half and also in China, as there's some concern about tariffs coming back on Chinese vehicles, is that how you see – can you give some more color on both those regions?

David A. Zinsner - VP, Finance and CFO: So, the first question is whether you see European car sales coming back, and I think you've answered that which is, that is an area where we – at least our early read from external sources that registrations appear to be growing in that space. So, there is some reason to be positive. Having said that, I mean the European car manufacturers end up selling all over the world and there's some big consumption in other markets for some of the premium brands that are manufactured in Europe. So, we're not necessarily at the mercy of the economy over in Europe. So, that's – I think one significant point. The other question, what was the question?

Vijay Rakesh - Sterne, Agee & Leach, Inc.: The tariff…?

David A. Zinsner - VP, Finance and CFO: The tariffs yeah, I mean (indiscernible) still but I don't think we have enough clarity. We're not selling cars. So, I'm not sure we have enough visibility into what's going on with the Chinese government and how they're going to manage internal versus external manufacturing. Did you have a follow-up question, Vijay?

Vijay Rakesh - Sterne, Agee & Leach, Inc.: Industrial, what were the key markets there for you and what signs are you seeing that gives you optimism on the second half on industrial?

Vincent Roche - President and CEO: Well, the strongest two sectors – we grew everywhere, all the top applications in industrial grew for ADI. The strongest were instrumentation as well as industrial automation. Things like factory automation, process control. They're our two biggest subsectors in industrial and both of them grew very, very well during the quarter. So, typically anyway in the second quarter we see good – very good seasonality in the industrial area, but as we said, the order patterns that we're seeing in the industrial area at large, big customers, small customers, all regions are performing quite well to-date. So based on that – based on what we hear from our customers we believe inventories are very, very lean by the way and that there is a good match between supply and demand in that area. So turns rates are quite high at the present time as well. Our distributors have also told us the same thing, at least our two major distributors. There are good macro trends in place as well that we have discussed from time to time around safety, connectivity, efficiency, productivity that make this a very – more and more attractive space for ADI given our breadth of technology and given our reach across the globe with large and small customers. So I think at the present time what we are seeing is primarily seasonality effect but demand continues at least in the short term briskly in the industrial area.

Operator: Sumit Dhanda, ISI.

Sumit Dhanda - ISI Group: First question on the wireless infrastructure piece. Vince you noted it strengthened at the end of the quarter but you are guiding the quarter flat in that segment into July. I am just curious as to how we reconcile sort of the momentum at the end of the quarter versus a flat guide and your comment on the delay with respect to the transition in China, is that a new comment or is that still implying that we should start to see some kind of a ramp?

Vincent Roche - President and CEO: First of the delay, our business is – the largest part of our business in wireless communications infrastructure is still 3G. It's about 70% of our total. So the transition to 4G creates a new opportunity for ADI, and that's just taking a bit longer than we all have anticipated. So it's also but a lumpy business. It's very hard to read. At the end of the day, our customer's customers, they are the carriers are – I think there's no great momentum. There's no great pattern in their spending at the present time. So it's just very hard to read. So that's why we are being cautious.

Sumit Dhanda - ISI Group: Then I guess as my follow-up question…

Vincent Roche - President and CEO: Go ahead. Sumit, are you there?

Sumit Dhanda - ISI Group: Yes, I'm right here. Sorry. As a follow-up question, industrial has done well, it was up double-digits last quarter, implied in your outlook is something like 4%, 5% sequential growth given that it's half the business and the other businesses are flat sequentially, which brings you sort of back to the peak run rate you had in the industrial business last year. So I guess my question is, do you feel at this point as you exit the July quarter, you would be caught up with consumption understanding that this is hard to ascertain with finality, but what's your best sense?

David A. Zinsner - VP, Finance and CFO: I'll take this one. I think it's obviously very difficult to read, 60,000 customers and to know for sure what their inventory levels are. Having said that, we do seem to be, at least as you look at distributors running at levels that are pretty consistent with their end demand, my best guess is that we are somewhere around where end demand or end consumption is. But I think what really is driving this kind of similar levels to last year is more around just kind of a lot of economic uncertainty that continues to overhang the market. So, hopefully, as the year progresses, there is more confidence around the economy globally and things continue to improve throughout the year, but at this point, it's hard to say. I think we're at least hopeful given that the outlook, right at the moment is that industrial will be up as you said, reasonably well that we're on the course of a recovery, but again, we're just going to have to wait and see how it goes.

Operator: Steve Smigie, Raymond James.

Steve Smigie - Raymond James & Associates: With regard to the products, I was wondering if you could talk a little bit about converters form the perspective or the fact that, it looks like that's up 1% year-over-year. I think it's probably the best performing category. I think that the growth there is better than overall Company revenue growth. So, obviously, you guys continue to do well in that category. Can you talk a little bit about strategy there. How do you go to market versus, I won't say specifically TI but obviously, they're a big player in that space, and the other guys. How do you continue to be dominant in market?

Vincent Roche - President and CEO: Converters for ADI, our products is in every application in which we play, every one of those segments that we've talked about today, use converters, either high speed or precision. When we think about allocating our R&D, we think first and foremost, let the underlying core technologies and products, and make – we insist on making sure that we have adequate coverage in terms of R&D to be able to develop the underlying technologies and products. The convertor space is an area where we have the broadest portfolio. If you look at any particular mode, any particular performance to mention of convertors in precision, in high-speed, we cover the entire thing. We have teams working on new generations of technology that we haven't even introduced to the market yet. So, we are pushing innovation in the core products that are critical to ADI's prosperity in the short-term. We're also pushing very, very long-term, new architectures, new process technologies, and combining convertors also in many new ways in new applications. So, in the infrastructure space for example, the communications, the wireless part of communications infrastructure. Our convertors form the heart of these wide band radio transceivers that we developed, that have a lot of RF technology on board, that are more and more linking up with the power management solutions that we have, linking up with the clocking solutions that we have. So it's a vast portfolio of standard products, products that are more highly integrated with convertors at their core, and as I said we first and foremost make sure that our core technologies are getting adequate investment to ensure that ADI keeps leadership position, and we keep gaining share. We've been gaining by the way over the past number of years just about 1% market share per year versus the competition on a compounded basis. So, 1 point per year, so we're in good position, we have lots of new applications. For example, I would like to point out that in the automotive area when you look at – we talk about battery technology and intelligent battery systems. Again that's a great example of where our convertors, precision convertors are being used in new ways and new applications in a critical application in the car. So there are many, many new areas where we play. Then if you look at the industrial area, we have perhaps with thousands of products that are selling – thousands of converter products with very, very long lifecycle. So we gave a tremendous mix in terms of the markets that we cover, the types of technology that we are developing and the types of customers to whom we sell.

David A. Zinsner - VP, Finance and CFO: I think these are called converters with attitude (indiscernible).

Steve Smigie - Raymond James & Associates: With regards to the 80% how do you decide 80% is the right number versus some other and if you were to say you used some cash to pay down is that in that 80% or is that something different?

David A. Zinsner - VP, Finance and CFO: So first of all just to clarify the percent number, I make sure that's crystal clear. That's 80% of total free cash flow and not 80% of domestic cash flow, hopefully that was clear. But how do we come up with it, we ran – like I said we ran some scenarios around business conditions. We added in some other potentially uses of cash on top of that which in some cases does include the financing side and what it told us was given our capital structure and our rating we could easily manage 80%. I think we are very comfortable with the debt level we have and so there's no reason when that instruments mature that we need to pay them off. We can kind of refinance them assuming rates are attractive, which they clearly are today. We even feel comfortable going up in debt from where we're today. So we kind of balanced all those things together and given Vince's, one of his stated priorities is to deliver good shareholder returns. We thought that this was a pretty reasonable number that we thought investors would appreciate.

Operator: Christopher Danely, JPMorgan.

Christopher Danely - JPMorgan: Just one more question on the increased payout ratio and by the way, I think I speak for the entire buy side when I say kudos for upping it from 60% to 80%. Just a question on the buybacks, your share count has crept up I think over the last four quarters, can you just remind us of what's been the allocator for the buyback, has that increased, and is your methodology for buying back shares going to change at all?

David A. Zinsner - VP, Finance and CFO: So we have, I think, roughly $500 million plus, its $540 million or something like that. Ali do you know the number, $560 million of authorized – or authorization in the current buyback although it's pretty simple to get that increase to support the 80%. I think it will need to be increased candidly to get to the 80s. But that – but let's see how earnings go, the dividend how that ramps too because that's certainly an area that we want to increase over time as well. What was the other part of the question, Chris?

Christopher Danely - JPMorgan: Yeah, Dave, I think we've talked about this before is one of the – I guess one of the good problems, as your stock has steadily climbed up, you haven't really…?

David A. Zinsner - VP, Finance and CFO: Yeah. So that has been the case. I think in my prepared comments, I used the word disciplined repurchases or something of that nature, and that's kind of the way we're going to approach it. So, it's not going to be 80% every quarter. Some quarters, it's going to be higher than 80%. Some quarters it's going to be lower than 80%, but over the five years it'll average 80%, but we still intend to be pretty disciplined around the buybacks and hopefully buy back when the stock is at least on a historical basis at relatively low levels. So, I wouldn't look for us to come right out of the gate and start turning a buyback, but I think over time, you'll see us be pretty good disciplined buyers of the stock, with the idea that we don't want to see that share count creep in general.

Operator: Joseph Moore, Morgan Stanley.

Joseph Moore - Morgan Stanley: I remember last quarter you had talked about distribution inventories being extremely low in dollar terms, at a multi quarter low. So, I was a little surprised that they stayed flat and, can you talk about that dynamic and then I feel like the end customer inventory that you've been describing as low, we've all felt that way for several quarters, what do you think it's going to take to change that?

David A. Zinsner - VP, Finance and CFO: Well, a much more robust demand picture will certainly get distributor – and a lead time stretch out will certainly get distributors to begin the stock. We generally keep our lead times tight. So, we won't be the driver of it, but some of our peers, sometimes, allow their lead times to extend and during those periods, distributors generally across the board raise their inventory levels, but its 7.5 weeks. It's a pretty good – it's certainly at a low level, but they've certainly been below that. So, it's what I think is a healthy level in a period of recovery.

Joseph Moore - Morgan Stanley: Then just on the industrial customer side, on their inventory, I mean, as I've said you described it as low for – I think four or five quarters and I felt the same way, do you think it's oscillated at all in retrospect as you look back to that build up in the first part of last year and then come down or has it been generally lean throughout?

David A. Zinsner - VP, Finance and CFO: I think in the second quarter based on hindsight. They probably did start to build inventory and then over the third and fourth quarter potentially even the first quarter started to bring it back down.

Operator: Ross Seymore, Deutsche Bank.

Ross Seymore - Deutsche Bank: Just a question, a follow-up, Vince to something you said earlier about the comps business, with 70% of that being 3G-oriented, what sort of substitution effect do you guys see, because to be frank we've been waiting for quite some time for you guys and many other companies that have promised a big infrastructure spend increase, and it seems to me there's a risk that the 3G comes down as the 4G goes up, and the total really doesn't move as fast as people have hoped. Can you walk us through that transition and puts and takes to ADI please?

Vincent Roche - President and CEO: I think, what we see between the generations is more sophisticated solutions being required from ADI, we get more content. I believe in 3G systems, we're seeing an average ASP increase for a radio transceiver. On some of the regions 20% to 30%, depending on exactly who we're selling to and what the feature set is? So, I think a chunk of what we expect is primarily due to the ASP increases. We also have, we've mentioned before that we greatly increased our R&D in the wireless sector in the past four or five years to make sure that we can extend our reach, our competitive advantage in each of the equivocal macro application. So I think it's more about – for ADI anyway we are very well positioned with our customers. We have stronger solutions than we have ever had. So we are just depending Ross on the markets more so than anything else at this point. But everything we hear from the carrier discussions we have had from our customers, somewhere in the region of just able to meet the data capacity needs that mobile subscribers are requiring now all across the globe it's going to require a re-ramping, an aggressive re-ramping of the network towards 4G, towards the back end of this year.

Ross Seymore - Deutsche Bank: Just really quickly a couple of housekeeping ones and I apologize if I missed this earlier. Dave your expectations for utilization in internal inventory as you go into the third quarter?

David A. Zinsner - VP, Finance and CFO: Yes. I think we will be kind of low 60s in utilization next quarter. Inventory levels on an absolute dollar basis maybe kind of flattish but they should come down in days.

Operator: Romit Shah, Nomura Securities.

Romit Shah - Nomura Securities Intl.: I think most of us recognize ADI as a high-quality franchise and you guys are tied to some pretty attractive markets. But when I look at the growth at least on a year-over-year basis, it's been – this quarter to the July quarter will be the eighth consecutive quarter that revenue is down year-over-year and my question is would you guys just chalk that up to a tough end market environment or Vince in your new role are you looking at perhaps in different strategies to improve top line growth?

Vincent Roche - President and CEO: It's a very good question. I think what we're seeing at the present time is really just no real momentum but it's driven by just the macro economy everywhere, across the globe. Even China has not been immune to the macroeconomic malaise in the past year or year plus. We as a Company, we're an innovation centered Company with – our engineering excellence really, really matters to us, where we have a lot of very, very – people who care passionately about our customers. So we're going to do everything we can to extend the impact and the speed of our innovation and just to execute better everywhere, to speed everything up in the Company and just improve ADI in every dimension of innovation. So I believe that the franchise we have is one of the very, very best in the semiconductor world. Myself, with the 9,000 employees are going to make it an even better franchise in the future. So we're working on a lot of things internally to make everything better.

Operator: John Pitzer, Credit Suisse.

John Pitzer - Credit Suisse: A couple of questions just quick, David, I'm little confused by the opening comments, utilization is going to be up or down in the July quarter and ditto on OpEx, it just sounds like you guys are still keeping things pretty tight. I guess my question is, if things were to pick up or does the lack of utilization growth or OpEx growth in July quarter give us a (brocatelle) of how you guys are viewing the October quarter?

David A. Zinsner - VP, Finance and CFO: Well, utilization is going to be up next quarter. I think it was like around 60%, I think it's going to be in the low-60s, consistent with our expectations around the industrial business for the most part. I wouldn't read too much into our OpEx for next quarter, some indication of the next few quarters, what we're trying to do is really, lag the revenue side a little bit, because leverage is pretty important to us and quite honestly, we think we're spending enough money to drive revenue growth. So, we're going to just be careful about where we add – make sure we're adding it in the right places that we think will drive good ROI.

John Pitzer - Credit Suisse: Then quickly David or Vincent, can you guys give us a little bit of insight to what big buckets or sub buckets there are within the consumer, is this mostly handset or how do I think about kind of the sub buckets within that category?

David A. Zinsner - VP, Finance and CFO: We'll answer this one, but we've got to stop the follow ons because we're going to run out of time here, but there's about four or five sub categories, portable is one of them. It's one of our areas that we think will drive growth, but it's by no means a dominant part of that business. We have a digital camera sub category in there, we have a home entertainment system which includes, I think prosumer, which Maria tells me is a real word. There is some computer exposure in that space and then we have a bunch of smaller sub categories that get the all other kind of classification. So, it's a pretty – from a consumer perspective, it's a pretty diverse set of end customers and applications.

Operator: Stacy Rasgon, Sanford Bernstein.

Stacy Rasgon - Sanford Bernstein: I have two quick ones on the cash return again. You talked about, over the next five years, getting up to 80%. How long does it actually take to ramp to that point? Is this something where we should really expect a step change or is this something that builds in? Second question, just really quickly to save time, you talked about – sounds like mostly dividends with opportunistic buybacks, but over the last few years, it's been primarily dividends. It sounds like you're going to focus on that. So, does that increase in the cash return of what you're talking about really imply a very significant increase in dividends, is that really how we should be thinking about this in terms of what's driving the cash return?

David A. Zinsner - VP, Finance and CFO: So, I wouldn't look at the 80%, as we're going to try to ramp to 80%. We're going to try to average 80% over a five year period. Some quarters that's going to mean, it's going to be plus 80%, some quarters it might be below 80%, but the average is supposed to be 80%, I don't think next quarter it'll be 80%, although we'll kind of have to see, we haven't changed the approach we have towards buybacks. The buyback aspect of this thing is that we will buy when a historical price is above the current price, by some measure and that's what will trigger the buyback. It's to some extent on autopilot I guess, and we'll just to execute when and if those situations occur. My guess is they will occur, and that will be a reasonable amount of the 80% free cash flow return, but it's true that the primary means of returning cash to shareholders is going to be dividend. Having said that, I wouldn't expect the dividend per se to ramp dramatically at a rate that's dramatically faster than earnings growth rate it will in all likelihood be at a faster rate than earnings growth, but I don't think it's going to be too dramatic, and that because we have an expectation that we will buy back stock and that will be a part of the cash return and it will be a meaningful part of cash return.

Operator: Steven Eliscu, UBS.

Steven Eliscu - UBS: You referred to the low-end of sales guidance being based on the possibility of macro weakening, are you actually seeing any signs that there could be weakening as we go into the middle of the year or is this caveat just based on what we have seen the last couple of years?

David A. Zinsner - VP, Finance and CFO: No. This is strictly just caution around the just kind of macro side of things and we have seen no evidence to suggest that. Clearly we are modestly I guess or slightly influenced by what happened last year.

Steven Eliscu - UBS: As my follow-up question, if I look at your – there is a prior reference to convertors, but if I look at amplifiers, actually if you look at the year-on-year trends they actually weakened last quarter. Is there anything fundamental that's driving the weakness, is it tied to particular segments such as communications? Can you help us understand that?

Vincent Roche - President and CEO: It's very, very hard to ascribe the shifts in a quarter to any one particular segment or any particular application area. I think overall as a Company we have strong share and we play in the high performance amplifier area and I think you have to really look at our share over a long period of time. Just like in converters these two areas form the core. These are ADI's backbone and we have actually been gaining share in the high performance amplifier space over the last while. So I think looking at these numbers quarter-on-quarter-quarter don’t tell you anything because we have been gaining share.

David A. Zinsner - VP, Finance and CFO: The other thing is that in some cases this stuff is all integrating together and then we have to lump it into something called Other. It becomes an Other category.

Vincent Roche - President and CEO: An identification issue.

David A. Zinsner - VP, Finance and CFO: Yes. So a lot of times the functionality that was a standalone amplifier is not a standalone product anymore and so we kind of classify it in Other.

Ali Husain - Director of IR: Thank you. We have run out of time and well past the 6 o'clock hour. But Vince, do you want to come back and do your closing remarks, before we sign off here.

Vincent Roche - President and CEO: Sure. Well first of all, I'd like to thank everybody for participating with us today here. So far, we've discussed our results and our trends related to the industry, our markets and our shareholders. So in closing, I want to share with you what I've been discussing with our employees since I've took over as President several months ago, and what I continue to tell our employees as the CEO of the Company. My primary focus is to accelerate ADI's growth. This world will emerge from the economic malaise that has dominated for the past five years or so and when it does, my job and the job of all our employees is to make sure that ADI emerges stronger and better. Our strength will be evidenced in the growth rate of our sales and the expansion of our operating profits. This generates earnings leverage and strong cash flow. The domain of signal processing in which we lead presents an excellent growth opportunity in the years ahead as the world drives for more automation, greener energy, affordable healthcare, more connectivity and mobility. All of these trends face complex technical challenges, and we have a culture here at ADI that thrives in finding innovative ways to solve very complex problems for our customers. Many competitors also see this opportunities, but none of them have the breadth and depth of our signal processing engineering expertise and our customers also recognize us for this fact. We will focus on solving not only the complex problems but also the critical problems, and this means we much continuously assess how we allocate our R&D and actively steer investments to our areas where innovation creates the greatest momentum for ADI. More and more, I feel employees deepening their customer engagements, bringing the outside world into the Company, and to finding and solving the critical problems before our competitors do. I firmly believe that engineering excellence, coupled with deep customer and market insights drive superior innovation and superior innovation drives superior results. So, I along with our 9,000 employees will settle for nothing less. So, with that, I'd like to thank you and wish you a good evening.

Ali Husain - Director of IR: Great. Thanks a lot, Vincent. Thanks everyone for joining us tonight. Just a reminder that our third quarter 2013 earnings call is scheduled for August 20, 2013 beginning at 5.00 PM Eastern Time. So, thanks everyone or joining us tonight. Good night, and have a pleasant evening.

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