Q1 2017 Real-Time Call Brief

Highlights

With exception of revenue, our commentary about ADI's first quarter financial results will exclude special items which in the aggregate totaled $85 million for the quarter.

On comparing our first quarter results to our historical performance, special items were also excluded from the prior quarter and year-over-year results.

Revenue of $984 million was well above the high end of our guidance, growing 28% over the prior year and we had broad strength across all our markets and we expanded operating margins over 700 basis points from the prior year to 35% of sales.

Earnings per share of $0.94 was up 68% from the prior year and $0.16 better than the high end of our guidance.

We have generated $1.2 billion in free cash flow over the past 12-months.

Just digging deeper in our results by end market, the Industrial Market was 41% of revenue and increased 1% sequentially.

Compared to the prior year, the Industrial Market showed considerable strength. It grew 15%.

On the Automotive side, the Automotive Market at 14% of sales was also better than seasonal. It decreased really only slightly from the prior quarter but grew very strong 10% over the prior year led by really content rich applications such as infotainment, Powertrain, and ADAS.

On the Communications Infrastructure side, revenue there in that market was 18% of sales. Again it was also ahead of expectations increased slightly sequentially and was up 4% over the prior year led by Optical Networking.

The Consumer Market was 27% of sales in the first quarter. It decreased 8% sequentially which is much better than seasonality as we saw continued strength in portable consumer applications and Consumer more than doubled over the prior year in the first quarter.

Revenue in the first quarter as we mentioned totaled $984 million and diluted earnings per share was $0.94.

Gross margins at 66.1% were above our guidance on a better mix of business and higher revenues.

Inventory on a dollars basis decreased $11 million sequentially and days of inventory were within our model range at 101 days, down from 105 days in the prior quarter.

Utilization rates in the first quarter were in high-60s and we're planning to increase utilization to the mid-70s in the second quarter.

During the quarter we recorded a $49 million restructuring charge primarily related to a voluntary early retirement program for certain US employees. Excluding this and other special items, operating expenses increased 7% sequentially with the entirely of the increase tied to our Variable Compensation Program which is based on year-over-year revenue growth and operating margins metrics.

Operating margins at 35% of sales expanded over 700 basis points compared to the prior year on strong revenue growth and prudent expense management.

Other expense in the first quarter was approximately $26 million.

The result of a partial quarter with the permanent financing related to the Linear Tech acquisition in place, we expect our net interest expense to be approximately $30 million per quarter until we close the Linear Tech acquisition.

Our first quarter tax rate was approximately 8% which we expect will be our tax rate until we close down the acquisition.

Excluding special items, diluted earnings per share increased 68% over the prior year to $0.94.

The first quarter was also a strong free cash flow quarter. We generated $286 million in free cash flow which was an increase of 46% over the prior year and over the past 12 months, ADI has grown free cash flow 20% to $1.2 billion or 34% of sales.

Capital additions in the first quarter totaled $28 million and we're planning for the capital additions in 2017 to be in the range of $130 million to $145 million.

In line with our shareholder value creation strategy, our Board of Directors approved 7% increase in the quarterly dividend to $0.45 per share which represents an annual dividend increase to $1.80 per share.

Now turning to our outlook and expectation for the second quarter of 2017, which with the exception of revenue expectations, is on a non-GAAP basis, and excludes known special items that are outlined in today's release.

After a record setting first quarter revenue performance which was also well above the high end of our guidance range, we are planning for the B2B markets of Industrial, Automotive and Communications Infrastructure in the aggregate to grow in the mid to high digits sequentially in the second quarter and to increase in the high single-digits over the prior year.

In Consumer, we are expecting that normal seasonal patterns will prevail and that this business will likely decrease between 40% and 50% sequentially. Nevertheless, we expect Consumer to be up significantly over the prior year in the second quarter.

In the aggregate we're planning for revenue in the second quarter to be in the range of $870 million to $950 million which at the midpoint represents year-over-year revenue growth of 17% and would represent the fourth quarter consecutive quarter of year-on-year revenue growth.

Gross margins are expected to increase to be between approximately 66.5% and approximately 67% on higher utilization rates and a more favorable mix.

We estimate that operating expenses will be down approximately 3% to up approximately 1% sequentially in the second quarter.

Based on these estimates and excluding any special items, diluted earnings per share are planned to be in the range of $0.74 to $0.86 which at the midpoint would represent very strong year-over-year earnings per share growth of about 25%.