Edited Transcript of Analog Devices (ADI) Q4 2014 Results Earnings Conference Call…
Analog Devices (NASDAQ:ADI) hosted a conference call with investors and analysts to discuss Q4 2014 earnings results on November 25, 2014 at 5:00 p.m. ET. The following are the webcast audio and the associated transcript of the event…
Analog Devices (ADI) Q4 2014 Results Earnings Call – Webcast Audio
Operator: Good afternoon. My name is Jennifer, and I will be your conference facilitator. At this time, I would like to welcome everyone to the Analog Devices fourth quarter and fiscal year 2014 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. Please limit yourself to one question to ensure that management has adequate time to speak to everyone. (Operator Instructions)
I would now like to turn the conference over to your host for today, Mr. Ali Husain, Director of Investor Relations. Please proceed.
Ali Husain – Director, Investor Relations
Great, thanks, Jennifer. And good afternoon, everyone and thanks for joining our fourth quarter and fiscal year ‘14 earnings conference call. We’ve posted a press release and relating financial schedules on our IR website at investor.analog.com.
Now, I’d encourage everyone to follow along as we go through our results today.
Our agenda for this afternoon’s call will be as follows: First, I will provide a brief overview of our fourth quarter results. Then Dave Zinsner, our Chief Financial Officer, will review our financial performance for the fourth quarter and fiscal year ’14 which will be detailed further in our 10-K which we expect to file next week as we finalize the purchase accounting relating to the Hittite transaction. Dave will also discuss our outlook for the first quarter fiscal ’15. And then Vincent Roche, our President and CEO will provide closing remarks.
Now after these comments, we will open it up for questions. Since we will be discussing both our fourth quarter and our fiscal year results today, our prepared remarks will run for about 20 minutes which should still leave ample time for Q&A.
Today’s call will include non-GAAP financial measures that have been adjusted to exclude special items in order to provide investors with useful information regarding our historical results and our outlook. Reconciliations of these non-GAAP financial measures to their most directly comparable GAAP measures are included in today’s earnings release, which is posted on our IR website.
The information we are about to discuss including our objectives, and our first quarter outlook includes forward looking statements. These forward looking statements include risks and uncertainties including but not limited to those described in our most recent 10-Q. Our actual results could differ materially from the forward looking statements made on today’s call. Subsequent events and developments may cause our outlook to change and as required by law, we do not undertake any obligation to update the forward looking statements made by us today to reflect the subsequent events or circumstances. Therefore this conference call will include time sensitive information that may be accurate only as of the date of today’s live broadcast. And so now let’s start the call.
So as you know, we completed the acquisition of Hittite Microwave in late July. So our fourth quarter was the first full quarter of contribution from Hittite. And our combined performance was very strong with results that were well above the midpoint of guidance.
Revenue in the fourth quarter totaled $814 million, increasing 12% sequentially and 20% year-over-year. On an organic basis, revenue increased 2% sequentially and 8% year-over-year.
Communications infrastructure applications outperformed our revenue plan while the industrial automotive and consumer end markets were about in line with our expectations for the quarter. Revenue from communications infrastructure customers represented 27% of total sales, and increased 31% sequentially in the fourth quarter with both our organic and acquisition-related revenue growing faster than expected. On an organic basis, fourth quarter communications revenue grew 5% sequentially and 23% year-over-year. And for the fiscal year, communications infrastructure revenues totaled $681 million.
Industrial customers represented 45% of total revenue in the quarter, increasing 6% sequentially and 19% year-over-year. On an organic basis, industrial performed as expected, declining 4% sequentially, primarily in the core industrial applications areas of automation and instrumentation while energy, healthcare and defense and security in the aggregate were approximately flat sequentially.
For the fiscal year, industrial application revenue totaled $1.3 billion. Our automotive business grew in line with expectations, increasing 3% sequentially and 2% year-over-year. And this market represented 17% of our total revenue in the fourth quarter.
In fiscal ’14, our automotive business grew 9%, or about two times the rate of vehicle unit growth. Automotive is now a $500 plus million a year business having grown at a 20 plus percent CAGR over the last five years and consequently more than doubling revenues since fiscal 2009.
Consumer revenue increased 14% sequentially, declined 3% year-over-year and represented 11% of sales in the fourth quarter. Approximately half of our consumer business is within prosumer audio video applications where life cycles and profitability levels are akin to our industrial business. The balance of our consumer revenue or only about 6% of total sales is for more typical consumer applications such as smartphones, tablets, wearables and DSLR cameras where our technology provides a real strategic benefit to our customers.
In total, we ended the year with revenue up approximately 9% to $2.9 billion, of which 89% was from the industrial, automotive and communications infrastructure markets.
And so now I’d like to turn the call over to Dave for details of our financial performance in the quarter and for the full year, as well as for our business outlook for the first quarter. With the exception of revenue, Dave’s comments on our fourth quarter ‘14 P&L line items will exclude special items which in the aggregate totaled $126 million. When comparing our fourth-quarter performance to our historical performance, special items are also excluded from the sequential and year-over-year results. And reconciliations of these non-GAAP measures to their comparable GAAP measures are included on Schedule E of today’s earnings release. Dave, it’s all yours.
David Zinsner – Chief Financial Officer
Thanks, Ali. Good afternoon everyone and thank you for joining us today. The fourth quarter was an excellent quarter across multiple dimensions. Revenue growth and profitability were strong and the strength of our balance sheet enabled us to meaningfully increase stock buyback activity in response to stock price volatility, which reduced our share count by approximately 2 million shares.
Sales in the fourth quarter increased to a record $814 million, well above the midpoint of guidance, and diluted earnings-per-share, excluding special items, grew to $0.69, near the high end of the range.
Gross margin at 66.4% of sales was better than our guidance on a better mix of business. Compared to the year-ago period, gross margins increased 80 basis points on higher utilization and a better mix. Excluding acquisition-related inventory, days of inventory in the fourth quarter decreased by two days to 215 days and on a dollar basis, inventory increased $3 million compared to the prior quarter.
We expect to bring utilization rates in our fabs down by approximately 10 percentage points to the low 60s in the first quarter, which on an expected lower sales should keep dollars of inventory approximately flat to fourth quarter levels.
Weeks of inventory in distribution were approximately 7.5 weeks, consistent with the prior quarter. Total end customer orders decreased in the fourth quarter as compared to the third, in line with seasonal patterns and our book-to-bill was below 1 which is quite typical in advance of a seasonally slower first quarter.
Lead times during the quarter were stable with virtually all shipments occurring within our stated lead times of 4 to 6 weeks. We continued to align our investments to critical strategic priorities and during the quarter we streamlined our management structure and took other actions to redirect investments while maintaining operating expense control. As a result, during the quarter we recorded a $35 million restructuring charge.
Operating expenses in the fourth quarter increased 10% sequentially, primarily from the inclusion of a full quarter’s activity with Hittite. On an organic basis, expenses were approximately flat to the prior quarter. As a percent of sales, operating expenses in the fourth quarter declined 90 basis points sequentially and declined 70 basis points year-over-year.
Operating profit before tax increased to $271 million or 33.2% of sales which is 70 basis points higher compared to the prior quarter and 140 basis points higher than the same quarter in the prior year.
Other expense, which is primarily our net interest expense, was $6.4 million in the fourth quarter. We’re expecting net interest expense to be approximately $5 million per quarter in fiscal 2015.