Analog Devices Inc (ADI) — Q3 2023 Earnings Call Transcript

Thank you, Michelle, and good morning, everybody. Thanks for joining our third quarter fiscal '23 conference call. With me on the call today are ADI's CEO and Chair, Vincent Roche; and ADI's CFO, Prashanth Mahendra-Rajah. For anyone who missed the release, you can find it and related financial schedules at investor.analog.com. On to the disclosures. The information we're about to discuss includes forward-looking statements, which are subject to certain risks and uncertainties as further described in our earnings release, and other periodic reports and other materials filed with the SEC. Actual results could differ materially from the forward-looking information, as these statements reflect our expectations only at 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. We are 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. And with that, I'll turn it over to ADI's CEO and Chair, Vincent Roche. Vince?

Thank you, Mike, and a very good morning to you all. ADI executed well in the third quarter and delivered results within our expectations despite the challenging operating environment. Revenue was nearly $3.1 billion, led by growth in our Industrial and Automotive markets once again. Gross margin remained strong, above 72%, operating margin was nearly 48% and EPS was $249 million. This continued profitability reflects our portfolio's resilience as well as the innovation premium that it commands. I want to turn to the current business environment now just for a moment. As we shared last quarter, we believe we're in a period of customer inventory reconciliation following three consecutive years of steady growth. Through our customer conversations, it's evident these accelerating inventory adjustments relate to the weakening macro backdrop and ADI's rapidly improving lead times. Importantly, we believe we shipped below end market consumption in the third quarter and expect to do so again in the fourth. This will help normalize our customers' inventory more quickly and position us to return to growth more quickly in the coming quarters. Stepping back, while near-term dynamics are turbulent, our long-term confidence remains undiminished. Over the last several decades, we have enhanced the resiliency of our global business, defined by our diversified customer and product portfolio and flexible hybrid manufacturing model. This enables us to ensure softer demand periods while sustaining strategic investments to ensure that we capitalize on the upside when the business inflects. It's these characteristics and our alignment to numerous concurrent secular growth trends that give us confidence that ADI will deliver on our long-term model of 7% to 10% revenue CAGR. Now, one area underpinning this growth outlook are the applications tied to sustainable use cases, which currently represents about one-third of our total revenue. And today, I want to unpack a vital part of this, the evolving electrification ecosystem that is driving growth in our industrial and automotive markets. As the world marches to net zero, we need to eliminate 51 gigatons of global greenhouse gases emitted every year. Fossil fuels are by far the largest contributor, accounting for more than 75% of all emissions. At the same time, global energy consumption is forecasted to increase by 50% by 2050. A major necessary energy transition is underway, and an upgraded and expanded energy grid is foundational to support a decarbonization pathway. Making the shift through renewable energy sources in both commercial and residential infrastructure as well as electric vehicles and global transportation will reduce greenhouse gas emissions. These moves also create new challenges in the generation, distribution, consumption, and smoothing of energy supply. ADI solutions are embedded across all phases of this electrification journey, from upgrading the grid infrastructure to forming and managing the vehicle battery. The common thread woven through all these applications is the high-performance precision signal processing, control, and power management capabilities they require, capabilities in which ADI excels. Now today, I'll bring the story to life at the application level, starting with grid infrastructure. Overall, today's electrical grid is undergoing modernization to meet current and future demands. Historically, traditional energy sources like coal, oil, and gas were centralized and distributed in one direction from the grid to the consumer. Today, renewable energy sources like wind and solar are more distributed, necessitating a dynamic bidirectional flow of energy. To achieve this, the grid must be able to adjust performance across the network in real time, which requires an exponential increase in monitoring and storage capabilities. For example, our collaboration with the Enel Group provides smart meters and grid digitalization solutions for distribution system operators. Here, ADI's control and sensing technologies are enabling high-performance, precision monitoring and data creation at the heart of the digital substation. We're leveraging our mixed-signal digital and algorithm technologies to enable greater intelligence at the grid's edge. Now, moving to energy storage systems, which are critical to mitigate intermittency issues across the network. ADI is a leader with our technologies used in 60% of energy storage systems across residential, commercial, and grid-scale networks. Leveraging our battery management system technology, we are increasing capacity and improving energy utilization in energy storage systems, which maximizes the battery's lifetime value. These monitoring and storage challenges extend to the grid's edge as well, including EV charging stations. ADI's energy metrology, isolation, and sensing technologies help enable a broader range of applications in AC and DC charging equipment. In addition to these important applications in our highly diverse industrial segment, our high-performance signal processing platforms and domain expertise are helping to electrify the automotive market. Here, our technology is a key enabler in the transition from combustion engines to cleaner electric vehicles by increasing range and lowering cost. I'll start with battery management systems. As we've shared before, we are the leader in this area with our BMS solution designed into 16 of the top 20 EV manufacturers. We're currently sampling our eighth-generation solution, which utilizes software and algorithms to enable physical measurement capabilities all the way into the battery cell. These advances in edge processing change the game in how the internal battery health is managed, supporting faster charging and better range prediction. An extension of this is our wireless BMS solution, a first in the industry. It has all the benefits of our wired solution and enables a scalable battery architecture, with quicker and more cost-effective production cycles. Currently, our wireless BMS is designed in at four OEMs, and we expect another large OEM to adopt it in the coming quarters. Given this momentum and the cutting-edge value proposition, we believe the wireless platform will represent a large portion of our BMS revenue by the end of the decade. Looking ahead, we're broadening our EV capabilities beyond battery management and storage to power conversion solutions. Specifically, we're developing a silicon carbide-based smart switch for bidirectional onboard charging that significantly reduces charger size and weight by over 50%, thus driving down cost. Notably, this intelligent integrated switch enables the EV to transfer energy back into the network, creating a more reliable grid. This innovative solution more than doubles our content opportunity per EV powertrain. In summary, ADI is driven by a deep sense of purpose and a desire for our innovations to positively impact all stakeholders. We're immensely proud of the role our technologies play to improve the well-being of humanity and indeed the planet, and I remain very confident in our future. Our portfolio of cutting-edge technologies and world-class talent base are aligned with an unprecedented number of attractive secular trends, where the semiconductor content per dollar of CapEx is increasing tremendously. This presents ADI with continued profitable growth opportunities as well as the ability to shape the future of industries. With that, I'll hand it over to Prashanth.

Thank you, Vince. Let me add my welcome to our third-quarter earnings call. My comments today, with the exception of revenue, will be on an adjusted basis, which excludes special items outlined in today's press release. While demand continued to soften throughout the quarter, ADI delivered nearly $3.1 billion in revenue, in line with our guidance. This was driven by continued year-over-year growth for both Industrial and Automotive. Looking at our performance by end market, Industrial, which represented 53% of revenue, finished down 7% sequentially after a tremendous stretch of 13 straight quarters of sequential growth. On a year-over-year basis, revenue increased 4%, with most applications up, led by sustainable energy as well as aerospace and defense, which each grew double digits. Automotive, which represented 24% of revenue, was down modestly sequentially in line with our expectations. Year-over-year growth of 15% was broad-based. We saw continued outsized growth for ADI's leading battery management and in-cabin connectivity solutions, which collectively increased nearly 30% year-over-year. Communications, which represented 12% of revenue, decreased double digits, both sequentially and year-over-year due to the broad-based inventory correction we flagged previously. Lastly, the consumer segment, which represented 10% of revenue, came in stronger than expected, finishing up 15% sequentially, but down 21% year-over-year. We remain optimistic that our second quarter marked the bottom for this business despite the ongoing inventory correction. Now, on to the rest of the P&L. Gross margin of 72.2% remains industry-leading, but declined sequentially due to lower utilization and product mix. Operating expenses of $752 million were roughly flat year-over-year and up sequentially. This quarter's OpEx reflects the full impact of annual merit increases. Operating margin of 47.8% contracted 230 basis points year-over-year, roughly in line with the gross margin decline. Non-op expenses were $57 million, and our tax rate was 11.2%. All told, EPS came in at $2.49, within our guidance range. Moving to the balance sheet. We ended the quarter with over $1.1 billion of cash and a net leverage ratio of 0.8. Given the revenue pressures and our decision to hold more finished goods versus restocking the channel, inventory dollars increased, and the days of inventory moved higher to 179. As a result, channel inventory remains below our target level and slightly declined. Specifically, we strategically undershipped Asia, especially China, due to weaker demand trends. CapEx was $325 million for the quarter as we invest to enhance ADI's global resiliency and offer our customers options on where their products are sourced. 2023 should represent the high watermark for CapEx, and we expect it to decline in 2024. Importantly, our investments do not include the benefits of tax credit and grant funds that we anticipate from both the U.S. and the European Chips Act. Over the trailing 12 months, we've generated $3.7 billion of free cash flow or 29% of revenue. Over the same period, we've returned nearly $5 billion to shareholders or over 130% of free cash flow via more than $3.3 billion in buybacks and more than $1.6 billion in dividends. Now turning to the Q4 guidance. We expect the fourth-quarter revenue to be $2.7 billion, plus or minus $100 million. This outlook assumes sell-in to be below sell-through. At the midpoint of our outlook, we expect all markets to be down sequentially due to the broad-based inventory correction. On a relative basis, Auto and Consumer should perform a bit better than Industrial and Comms. Operating margin is expected to be 44%, plus or minus 70 basis points. This margin outlook embeds planned utilization reductions and a decline in OpEx. Our tax rate is expected to be between 11% and 13%. Based on these inputs, adjusted EPS is expected to be $2 plus or minus $0.10. As our outlook is lower than expected, let me provide some context on what we're experiencing and how we will navigate. Our revenue outlook reflects the broad-based macro softness across all end markets, all geographies, and customers both large and small. We are also strategically improving lead times to get a better view into demand and enhance customer satisfaction. Today, we're shipping over 85% of our products within 13 weeks, and this is up from 35% a year ago. As Vince mentioned, we are seeing customers accelerate inventory adjustments due to both the softer environment and our lead time improvements. As such, we're taking measures to preserve the integrity of our balance sheet, cash flow, and income statement. This includes further reducing utilization and lowering external wafer purchases with the goal to decrease inventory meaningfully in the coming quarters. Importantly, as we've outlined before, we expect gross margins to maintain a 70% level on a trailing 12-month basis. This gross margin resiliency is a testament to the flexibility of our hybrid manufacturing model and our unique swing capacity capability. Additionally, we're taking steps to reduce total OpEx by roughly $50 million sequentially. So, stepping back, we're not ready to call the bottom yet, but our history shows that we cycle up quickly. When we do, we will achieve higher highs. ADI has built a very resilient business, rich with opportunities. Our diversification and exposure to numerous secular trends drive our durable earnings stream and solid free cash flow, enabling us to consistently return capital to shareholders. To that end, over the trailing 12 months, we've returned $5 billion to shareholders or more than 5% of our market cap. As this is my last ADI earnings call, I'd like to give a quick thank you to Vince for his mentorship and counsel over the past six years to the ADI Board, including our audit chair, Karen Golz, for their unwavering support, and most importantly, to the world-class finance staff, including young Mike here for always reminding us of our commitments to you, the company's owners. I look forward to seeing many of you in the coming weeks as we get on the road. Mike, let's go to Q&A.

Thanks, Prashanth. I haven't been called young in a while, but I appreciate it. Now, let's move to our Q&A session. Can we have our first question, please?

Yes. Thank you. I have a question for Vince. So I know you're not ready to call a bottom. But some industry observers would say that this sort of inventory build started maybe late 2021, early 2022. Based on your guidance for the October quarter, you're sort of back to that level. So then you've seen these cycles, you've seen many of them. They're all different. But just wanted to get a sense for you of what you think we're getting close, especially given what I just said about that inventory adjustment now sort of being complete?

Yes. Thanks, Tore. When I look at this current cycle, the symptoms are always the same in these cycles, but the causes tend to have different components. I think right now, there are two inputs to this particular correction. One is the inventory digestion that has been building for 18 to 24 months now. The second, of course, is the macroeconomic situation, which is a major governor as well. But I think if you look at what we understand from the direct side of our business, for example, when we look at our largest customers' revenue growth and their forecast compared to our growth at these very same customers, we believe that we've been shipping below end market consumption in the third and will in the fourth quarter. One way to look at this is how long will the inventory correction take? My sense is it will be two to three quarters before we get through the inventory digestion cycle, and I think we're positioned as a company to get beyond it quite fast because we've been managing our factories very carefully and managing our inventories, both on our own balance sheet as well as our distribution channel. We've also taken a long-term view of the demand patterns of our customers. We haven't, in any way, forced them into, for example, long-term supply agreements, essentially, at this point in the cycle, that will force them to take products that they don't really need. We've been managing our channel aggressively, keeping more inventory on our own balance sheet. We will distribute the supply where we think it's needed when the recovery gets underway here. So that's my sense. In the industry, if you look back to the dot-com cycle or the 2008 financial crisis cycle, most downturns tend to last three to four quarters. My sense is over the next two to three quarters, we begin to see a recovery here, at least on the inventory side. Then it's really a question of how the macro-economy performs.

Great perspective. Thank you.

Thanks, Tore. Next question, please.

Thanks, Dan. Best wishes again to Prashanth on his next adventure. You said that you're not ready to call the bottom yet and Vince, you mentioned that the inventory digestion period could last for some more time. How should we think about Q1 seasonality? It tends to be down kind of mid-single digits. Do you think we should be prepared for something different than that? And if it is worse than kind of mid-single digits, do you still think that ADI can maintain gross margins above 70%? So just kind of puts and takes to help us align our models would be very useful.

Why don't I take that, Vivek? So first, quick comments just to make sure everyone has the Q4 guide correct. As I said in the prepared remarks, we are shipping below the forecast we have from our channel partners. We are intentionally bringing channel inventories down to help set us up for better strength. Included in the guide is the backlog coverage, which has some turns, but less than normal given the higher level of uncertainty. We would need some more turns and positive book-to-bill, which Vince mentioned is likely to be a quarter or two out. From an end market standpoint, we've got all end markets down quarter-over-quarter. We don't guide further than the current quarter, but some color is I think you essentially have it right. There's no reason to think that the first quarter would not be down seasonally, which we would call mid-single digits quarter-over-quarter. Our view will be driven by the holidays and the customer decisions to reduce inventory as they go into the year-end. We are not, at this point, seeing a more meaningful step down in Q1 based on what we can know today. Also remember every once in a couple of years, we have a 14-week quarter, and that will be Q1 of '24. On gross margins, I think we're actually quite proud of our gross margin story here. We've messaged a number of times that we would have the ability to maintain a 70% gross margin on a trailing 12-month basis with a peak to trough decline of 15%. Q4 is down about 17% from the Q2 peak. While we didn't give you a gross margin number, if you impute it from the OpEx math, you will see that we are able to hold that north of 70%, and we'll continue to work that. Regarding Q1 gross margins, my best sense now would be that we are likely to face a little more challenge on the utilization level as we bring inventory levels down, but we have been very successful in activating our swing capacity. We're actually doing about 10% better on utilizations because we have swing than if we hadn't activated it. We need to see how the math on all of that works out for Q1, but I wouldn't expect Q1 to be notably different from kind of where we are for Q4.

Yes. I'd like to add one other comment, Vivek, to what Prashanth has said. The other side of margin is pricing, and pricing is very stable. It's very, very stable and resilient. I don't expect that to change. Our products are very, very sticky. We've got tremendous life cycles, and that part of our business is really a unit correction in the business rather than price or share.

Thanks for that. Helpful.

Hi. Thank you very much. This is Ambrish. Young Mike, feel free to chime in. I was looking at the year-over-year communications, and I look at TI as your closest peer rival competitor. Vince, they started going into a year-over-year decline in Q4 '22 and you are just starting, and you said two to three quarters. In the past history does suggest that usually on a year-over-year basis, we see roughly around four to five quarters of year decline. Is that the right way to think about your business? You said two to three quarters of digestion, and I'm assuming that means year-over-year decline in revenue, right?

Yes, that's a good question, Ambrish. Comms is just one part of ADI's overall narrative. We have two segments: wireline and wireless. On the wireline side, we have been experiencing challenges since late 2022 and early 2023, mainly due to factors like optical control for data centers and carrier networks, along with our power business. We anticipate some recovery in capital expenditures in that area to keep pace with the demands driven by the rapid increase in computing power needed for AI advancements. I believe the recovery in wireline will begin in the first or second quarter of the year. The wireless segment is more challenging to predict as it is quite dynamic. Developed countries, especially North America, have been focused on 5G deployments aimed at coverage rather than capacity, which likely means weaker performance than we initially expected. This may create challenges for an uncertain number of quarters in our FY '24. In India, however, the market has been robust this year, and we foresee more commitments to enhance both coverage and capacity in that region during FY '24. We maintain leadership in several areas, including optical control systems, 5G, and software-defined solutions. Ultimately, it comes down to timing in my view. There is significant uncertainty in the overall communications market right now, especially in the wireless segment. I hope this addresses your question.

Well, I was asking about the overall business, Vince, not just about the Comms, sorry.

Okay. Yes. Look, I think, Ambrish, the overall business. We see some trends that will transcend the inventory digestion problem. Even the macroeconomy areas like digital healthcare, aerospace, and defense, and the sustainable energy theme that we spoke to a little while ago. I will reiterate that my sense is the inventory digestion problem will last about two to three quarters, and then we'll return to unit volume increase from there.

Thank you.

Hi, guys, thanks so much for taking my question. Prashanth, I don't want to be pedantic on Q1, but I know you said right now down seasonal, but also has an extra week. That extra week, if I just linearize it is like a plus 7. So do those cancel out? Or is it like it's the week between Christmas and New Year, so it's not a lot of revenue? Or just how do I think about the balance of those two things into Q1, assuming a Q1 that was...

So when I gave you my comments on down seasonal, that was on a 13-week basis. The 14-week was just a reminder as you model it. Mike, do you want to do the math? I think you're essentially thinking about it right.

Yes. As Prashanth said, let's take a first 13-week quarter. What usually happens in Q1, in a 13-week quarter, our business is down, call it, 5%, plus or minus, total business. Now, with an extra week, that adds about 7.5%, both on the revenue side and the OpEx side. So there's two pieces: normally down 5%, total company; in the 14-week quarter, you can add 7.5% of revenue and OpEx. That's the best way to think about it.

And thank you for clarifying that, Stacy, I wasn't clear in my answer.

Okay. And then that would drop off into Q2, though, you go the other way in Q2. So Q2, under normal circumstances, would be worse than seasonal because you have that extra week drop off?

Yes. Again, you can parse it in normal times; Q2 is up, call it, 2% to 5% and a 13-week to 13-week quarter. If you take away an extra week, yes, you have a 7.5% headwind. They have got Q1.

Got it. Okay. That's helpful. I have another one, but I guess I don't want to get that answer next time, so I....

I'll allow another question because that's a good clarifying question, Stacy.

Okay. I just wanted to ask about OpEx into next year. So it sounds like you're guiding it to about $700 million in Q4. How do I think about it next year into a revenue year that's likely to be down potentially reasonably materially? Like how should we think about OpEx just year-over-year for fiscal '24 versus '23?

Yes. I think, Stacy, as we've always said, we run this business for the long term. We're going to make the adjustments that are prudent on the discretionary side, adjusting variable compensation and where we can. The value of this company comes from its innovation. I wouldn't expect meaningfully more attack on the spending into 2024. But remember that our variable comp is designed to be highly accordion. So if '24 plays out as a down year, you will see that meaningfully unwind for us. Anything else...

Is that $700 million runway, Mike, is that like the right run rate to think about?

That's not a crazy level to think about for the year. If you step back and look at what we're trying to manage within our control. We talked about gross margin maintaining at a 70% trailing 12-month basis. I think for the full year, we can do 70% gross margins, and our goal is to maintain our operating margins within our long-term target and the low end of that account is 42% to 45%. So that’s some guardrails we think about as you're modeling out next year and what would be a down year for revenue.

Got it. Thank you, guys.

Thanks, Stacy.

Thank you.

Hi. Thanks, guys. Congrats Prashanth on retirement. I wish I was joining you. I just had a question on the Auto end market. You're saying that you expect it to do, I guess, better relatively than Industrial. Given how much inventory has been built there, and the upcoming UAW strike, do you think it's possible that Auto could get materially worse? Are you baking that into any kind of forecast? And then are your Auto supply chain customers talking about a potential strike and the impact on their inventory?

Yes. All right. Thank you for the question, Chris. I think we're going to see you in a couple of weeks in New York. On Auto, I guess some context first: we've grown for 12 consecutive quarters year-over-year. Including the fourth quarter, we're going to be up again. We said in the prepared comments that the lead times and the confidence supply is driving some of that acceleration in inventory adjustments, and that's happening across all our markets. When we look specifically at Auto in the quarter and our growth rates there, the same strong growers, BMS, GMSL, A2B. They grew in the third quarter on both a sequential basis and year-over-year. We expect similar strength from them into the fourth quarter. Our outlook, as Vince said, is driven by end market units, and we have not yet put in a number nor have we received indicators from our supply chain partners that we should be making adjustments based on any disruption from the negotiations ongoing right now.

Yes. I think one other thing to note, Chris, is that, in general, there's more and more silicon value in cars every year, and that's true of ADI. We've got the switch to the electrification, which is in the early stages of adoption. So there are some great growth drivers that will somewhat transcend the malaise of the economic situation. We still expect that Automotive will continue to be one of the better growth areas for ADI for the foreseeable future.

Great. Thanks, guys.

Hi. Good morning. Sorry about that. In Q3, distribution was down, about 62% of sales. It was down about 4.5% sequentially. So that's less than the total business. Shipments to our direct customers came down around 8%. Perhaps you guys can discuss the shipments and excess inventory dynamics around both for Q3 and here in Q4. Is the excess inventory situation a little more pronounced than direct customers? And can you discuss how you monitor levels of sell-through and inventories at your direct customers?

Yes. Great. Okay. Let's do a couple of pieces on that. First, as a reminder, for a distribution company to do business with ADI, you have to give us your sell-through data on a weekly basis in arrears via electronic data feed. We know exactly where our distribution guys are doing business, and we use that to run the company, as Vince always said, we run it on a POS basis. We said in the third, sorry, in the second quarter earnings call that we had gotten a little ahead of ourselves in China and that we intended to undership China. In the third quarter, we have done that. We are now intending to undership all markets generally in the fourth quarter to continue to bring channel level inventories down. We have limited direct data visibility into our end customers' inventory levels, except for those customers where we have consignment. However, we can see the sales data of our products into our broad set of publicly external customers and their corresponding revenue growth. Our team builds correlation data based on that to tell us how we're doing versus their growth. This correlates to our confidence that we are undershipping their end market demand, allowing them to pull inventory levels down, which is safe to do so now that we can get our products to them within 13 weeks.

Yes. Prashanth, that's a great point. The shorter lead times are the best indicators of what our customers' inventory levels need to be. If a customer can get products quickly, they need to hold a little less inventory. So our lead time improvements are helping us give better visibility into what customers need to hold and what they're holding.

Yes. I think Prashanth said earlier, 85% of our total portfolio now is available in less than 13 weeks. Big, big change since this time last year.

Thank you, Harlan.

Thank you.

Hi, good morning. Thank you for taking the question. I had two quick ones, if I may. One on pricing. Vince, you mentioned that in the near term, it's more of a unit correction as opposed to a correction in pricing, which makes sense. If foundry pricing improves into 2024, would you be in a position to share that sort of cost down, if you will, with customers, the same way you've sort of passed on higher costs over the past couple of years? A second quick one for Prashanth: DOI 179, I think that's up, call it, 50 to 60 days compared to pre-pandemic. How should we think about the new normal going forward? How quickly can you get there?

Sure. Let me answer the pricing piece first, Toshiya. There are really two parts to it. We have 75,000 product SKUs that are the bedrock of the ADI franchise. They're very sticky, with product life cycles tending to be strong and fairly price insensitive. We're also increasing the value of our products each year. Managing the portfolio in terms of pricing includes looking for elasticity, which is normal. The benefit of lower costs will come at the design-in phase if we do get lower costs, but I think that's very unlikely. The message is pricing is stable, and the franchise is very durable.

I'll do the DOI one very quickly here, Toshi. So at 179 days, balance sheet inventory grew low single digits sequentially on a dollar basis. We have high confidence that we will exit Q1 with at least $100 million of inventory value reduction and the production plans are being oriented to allow us to do that. The days target is a model we've agreed should be blessed by the next CFO because they're going to own that and need to go through that. It won't be at 180 days, but it won't get back to 120 days. We'll come back to you on what that looks like.

That's very helpful. Thank you, both.

Thank you. Take the last question, please.

Hi, guys. Thanks for squeezing me in. Prashanth, congratulations on the great run. You mentioned a few times undershipping in the print and the guidance. I was hoping you could maybe quantify the extent or provide any sort of guidance on the amount that you're under shipping. Given it sounds like seasonal fiscal first quarter isn't off the table, does that mean we could expect you to be shipping to end demand exiting the October quarter? Thank you.

I'll let Mike take the second part of that question because I'm not sure I fully comprehended it. But on the first one, we have our business that goes through the channel and direct. For business through the channel, we have the demand forecast from our distribution partners, and we are under shipping into the channel to help them pull inventory levels down. We said that we undershipped for China last quarter, and this quarter we will do that across the globe for all distributors. On how to think about the under shipment into end demand that Vince referenced, we don’t have a real way to aggregate that, except to say that we have a correlation between our end customers' revenue growth and our growth to those customers. This is based on how their growth is and how we are doing for them.

Yes. The first question about expecting shipments into end demand is always a complex subject. We typically undershoot consumption in the first quarter as many of our customers reduce working capital going into year-end. The expected down 5% seasonal in Q1 indicates it will be below consumption. After that, we return to demand and consumption balance.

Okay. Definitely helpful. Thank you.

Any time. Thanks, everyone, for joining us this morning. We'll be on the road a lot this quarter. You'll find us in New York, Chicago, Florida, London, and San Francisco. Reach out to the IR team to be notified when we are in your ZIP code. With that, thanks for joining us and for your interest in ADI.