Q3 2024 Earnings Summary
- ADI anticipates robust growth in 2025, with confidence increasing since last quarter that Q2 was the cyclical bottom, supported by a record design win pipeline and strong secular tailwinds.
- Inventory levels are very lean, with channel inventory at the low end of the 7-8 week range, positioning ADI well to meet the anticipated demand upswing in 2025.
- Strong bookings growth in China, with double-digit growth across industrial, auto, and communications, and a very strong design win pipeline in the region.
- Continued Weakness in the Automotive Sector: ADI's automotive revenue has been declining, with auto being "down year-over-year for two straight quarters" and expected to be "down again in Q4" due to production cuts and inventory digestion across customers, particularly impacting their legacy automotive and electrification businesses. This trend is expected to continue into at least the early part of 2025.
- Lower Utilization Rates Affecting Gross Margins: The company's internal utilization rates are "well off the normal level of 85%" and are negatively impacting gross margins. Approximately half of the decline in gross margins over the past year is related to lower utilization.
- Challenging Economic and Geopolitical Conditions Limiting Demand Recovery: ADI acknowledges that "challenging economic and geopolitical conditions are limiting a faster demand recovery," and there is uncertainty about sequential growth continuing into the next quarter. They expect a "seasonal decline in the first quarter" with recovery dependent on macroeconomic factors.
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Cyclical Bottoming and Growth Outlook
Q: Will sequential growth continue into Q1?
A: Management expects a seasonal decline in Q1 but maintains optimism for a brisk growth in '25, depending on the macro environment. -
Segment Guidance for Next Quarter
Q: How will key segments perform in Q4?
A: Consumer is expected to grow about 10%, industrial to grow high single digits sequentially, communications to be flat, and automotive to decline low single digits sequentially. -
Automotive Inventory Digestion
Q: What's happening with auto inventory levels?
A: Automotive customers are reducing production and burning off inventory, leading to expected declines in Q4 and continued inventory digestion into early '25. -
Gross Margins and Utilization Rates
Q: How are gross margins and utilization trending?
A: Utilization rates are improving from previous lows but remain well below the normal 85% level; this, along with favorable mix, is expected to benefit gross margins. -
Operating Expenses Outlook
Q: How will OpEx change next quarter?
A: OpEx is expected to increase by about 5% sequentially due to merit increases, which will pressure margins despite higher revenue and gross margin. -
Industrial Bookings Visibility
Q: Has industrial bookings visibility improved?
A: Visibility remains consistent, with continued sequential growth across all industrial sub-segments except automation. -
China Bookings and Revenue
Q: How is China performing?
A: China shows strong performance with double-digit bookings growth in industrial, auto, and comms, offset by a decrease in consumer; the design win pipeline is very strong. -
Pricing Environment
Q: Any changes in pricing impacting margins?
A: Pricing remains stable across geographies and customers; no significant impact on margins is expected from pricing changes.