Analog Devices Earnings Call Insights: Gross Margins and Operating Expenses
Analog Devices Inc (NYSE:ADI) reported its fourth quarter earnings and discussed the following topics in its earnings conference call. Take a look.
Terence Whalen – Citigroup: The first question is related to gross margin. It seems like based on the utilization numbers that you’ve given of mid-50s for next quarter, it’s a fairly pronounced action you are taking in the fabs. I guess my question is what’s the motivation of that given that inventory isn’t too highs. It’s more to just set yourself up for a trajectory of expanding gross margin in the April quarter, and if revenue were to grow in April, I’d say 4% or 5% would gross margin also bounce back then?
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David A. Zinsner – VP, Finance and CFO: So, I’ll take a stab at and Jerry can add color if necessary. We’re bringing our utilization down to mid-50s levels that is different than what we did last year at this time. We had kind of a similar decline in revenue, but we allowed our days of inventory to kind of push up to 121 or 122 days last year. This time around we’re really trying to focus on keeping the days of inventory relative flat bringing the absolute dollars of inventory both on our balance sheet and the balance sheets of our distributors down, this is a bit different. The idea is to get the inventories well balanced and then be ready to get the leverage when the business returns to growth. As you pointed out, we had a big turn up in revenue in the second quarter. We’ll have a pretty quick acceleration in the gross margin quickly back to the levels you saw us operate in back in, a few quarters ago.
Jerald G. Fishman – President and CEO: I’d say the other commentary Terry is that we monitor the order input quite frequently and just like last quarter as we monitored the orders, we turn the factories down a little harder than we’d anticipated. If the order input justifies it. We don’t make these decisions once a quarter, we make them more frequently. If the orders begin to turn up and we see anything that we believe is sustainable, we can ramp very quickly and with the levels of inventory that we’re carrying, we can respond extremely quickly to any upside our customers provide to us. So, I think it’s all those phenomenon saying we want to manage inventory responsibly but we also at the same time want to make sure that when business does pickup then we can respond to whatever our customers ask us for given that our incremental sales particularly on the steps that we built internally the gross margins are extremely high. So, we don’t want to miss any of those sales and we don’t want to hang any of our customers down to drive. So, those are our objectives. Really to keep the inventories under good control and yet be flexible enough, so that we can respond very quickly, any input quarterly increase that we see.
Terence Whalen – Citigroup: Crystal clear and as a quick follow-up really on the OpEx line, you guys did terrific job in the prior cycle really reducing OpEx to help improve the operating margin, but when I look over the past eight quarters on a revenue that’s about down 15% from where it was two quarters ago, you’re right at the same OpEx bogey, so we’ve seen OpEx sort of creep back up the past couple of years. What’s the message to investors in terms of OpEx discipline here as we’ve seen OpEx creep up a little bit relative to sales over the past couple of years?
David A. Zinsner – VP, Finance and CFO: Well, it did creep up a little bit in the third and fourth quarter on a relative basis, but I think if you go back 8 to 12 quarters, we probably were averaging in of the low 220s, $220 million in terms of OpEx, that’s where we’re going to go to roughly in the first quarter. So, I think what we’re doing is prudently reacting to a little bit more difficult environment. I think we’ve done at least maybe my perception of this but we’ve done a very good job just closely managing OpEx to make sure that it doesn’t get away from us while revenue is just coming off. So, I think in the rest of the year, we’ll manage it very closely and Jerry mentioned a number of actions were taken in the first quarter, we’ll continue to look at it every quarter and not allow it to escalate until we see a big recovery on the revenue side.
Jerald G. Fishman – President and CEO: I think the other perspective on that is that if you look at the OpEx over the last two years for last year and – I mean our OpEx is the same now on a running rate basis as it was two years ago, one of those years had a lot of growth and one had decline. So, I think what – the way we’re looking at, trying to look at these things quarter-to-quarter because the revenue is fluctuating to a great deal, I think we had very significant operating expense controls in the Company and the evidence of that is the operating expenses through a lot of different parts of the cycle have been flat to last two years roughly.
Ross Seymore – Deutsche Banc Securities: Thanks for the first question, you had mentioned about the variable comp and how that will be a little bit lower or a threshold did to had a kick in it will be a little bit higher. In general should we think of it at given level of revenues now you’re going to have a lower level of OpEx I guess is the first clarification? Then the second part of that question is with the shutdowns that you’re having in the January quarter what sort of OpEx increase should we look at in the April quarter assuming the shutdowns don’t repeat themselves?
David A. Zinsner – VP, Finance and CFO: The shutdown is relatively modest. It’s a couple of million dollars and I think we have pretty good control over the OpEx that we won’t allow it to go up, unless the revenue start to grow and even if it does grow it will grow at a fairly modest rate. At the given revenue level, there are some other things that kind of creped in that offset some of the decline we’ll see on the variable comp fees. So, some of it’s a wash and I think OpEx we’re generally trying to get business to operate in kind of lower 30s, 30% to 31%, 32% of revenue and that’s what we’re kind of target to get back to as business kind of grows.
Ross Seymore – Deutsche Banc Securities: Then I guess as my one follow-up on the cash flow side of the equation, can you remind us what your expectations are for CapEx in the first quarter and then for the full fiscal year ’13?
David A. Zinsner – VP, Finance and CFO: We’re targeting to be somewhere in the neighborhood of $25 million for the first quarter. We have a general goal to be in the kind of $100 million to $125 million for the year. It obviously depends on how the business operates. If we more of a flattish environment, we’ll probably be more towards the $100 million. If things start to grow a bit, we’ll probably be closer to $125 million.
A Closer Look: Analog Devices Earnings Cheat Sheet>>