Analog Devices, Inc. (ADI) Earnings Call Transcript & Summary

Great. Good morning, everyone. Thank you for coming today. I'm Stacy Rasgon. I cover the U.S. semiconductor and semi-cap sector here at Bernstein. Today, it's my great honor to introduce our guest, the President and CEO of Analog Devices, Mr. Vincent Roche. Before I start, [Operator Instructions] ADI, look, of all the companies that I have covered, Analog Devices, I think, is one of the most respected. It has been. It's got an extremely high-quality franchise in the analog space, particularly as it relates to signal conversion and processing, and more recently now with the benefit of a few acquisitions power. Over the last decade or so, the company has embarked on a rationalization program of their product portfolio and their manufacturing footprint. They were smart enough to exit mobile. Some of you may not remember this. They exited mobile early enough to actually get paid to do it. And they've increasingly focused their product offerings on high-value applications whatever the end market as well as greatly increasing their presence in new markets like automotive and health care. They've not been shy to take advantage of inorganic opportunities to boost the franchise and growth potential. And they're now embarking on a regime of significantly more aggressive capital return. I'd say the investment controversies include, of course, the near-term environment. But beyond that, I think it's a lot about the long -- the new long-term model, what Maxim and some of the other deals add to that model. The sustainability of the growth profile in a post-COVID sort of shortage-plagued world and specifically around some of the end markets, really around what the emerging EV story looks like. I get a lot of questions there. And to answer these and hopefully many other questions, it gives me great pleasure to introduce Vincent Roche. Vince, thank you so much for being here today. I really appreciate it.

Thank you, Stacy, and good morning, everybody. Thank you for that very kind introduction.

My pleasure. I meant every word. Vince, I hate talking about short-term stuff in this session. I don't think we can avoid it. I want to get it over with. What's going on out there? What are you seeing?

Well, from our standpoint, we see extraordinary demand. The backlog is very, very strong. And I think while PMIs are decelerating, okay, across the globe, we still -- we're chasing supply. And I think it's going to be that way for at least the foreseeable future.

I guess to push it, how can that be if PMI is decelerating, and obviously, people are worried about double ordering, which typically it's not an unusual sort of thing to happen at this point, like I guess what gives you guys confidence that the demand trajectory, that you're saying which is extremely strong, is sustainable, especially in the wake of lead times that are really long? And you're just limited by supply at this point, right?

We're limited by supply. If -- I think we're getting in -- there's going to be a slowdown. I think it's a case of when rather than if. Now what will that do? That will have, I believe, a moderating effect on backlogs because there's certainly some anxiety buying that has been taking place over the last 1.5 years or so. But I think a slowdown is going to moderate what we would consider to be phantom backlog. But look, what is actually happening out there? I was at the World Economic Forum last week. I talked with many, many CEOs of the biggest of our customers, the big enterprises across the globe. And there's, I would say, a lot of optimism about what is happening with the IT sector in general, okay? You've got this connecting of IT and OT. You're going to see more and more the emergence of the intelligent edge. We're going to bring more and more kind of decentralized cloud to the edge, more connectivity, more compute power. And all of that is being aided and abetted by blockchain, artificial intelligence, cyber, et cetera, et cetera. So I think we are truly in a new period while it's taken this industry over 40 years to get to cumulative revenues of over $0.5 trillion, my sense is the next 10 years will double that. So whatever happens in the short term, I think the long-term demand pattern for the sector and for ADI will be very, very strong.

Yes. I don't think I just there, I mean even a 5% GDP plus kind of growth it should be a $1 trillion industry in 10 years, plus or minus.

I believe so. And I think also the pricing dynamics of the industry are different now than they used to be. We're in the post-Moore's Law era. And we're going to see, I think, ongoing inflation of prices in the business rather than deflation over the past 40 years.

So let's talk about that. Actually, that's maybe a good segue into what is new now. So pricing dynamic, obviously, we've been in an inflationary environment. I don't think there's been a single company in semis that has not been able to at least pass that cost inflation along. That's been a pretty good place to be relative. What are you guys doing, I guess, that's different now in terms of being able to maintain and sustain that pricing? And the reason I ask is it's actually a related question, which is obviously capital intensity and costs in general are going up. Like we've got competitors like TI who's doing it all. You got a little more hybrid approach, which we'll talk about. But somebody has to pay for that along the chain, whether it's you or it's the founder, it's the customer. And you do seem to think like you can continue to create value and continue to pass that on. Like what are you doing? What is different now that enables that?

Yes. So I think maybe the way...

There's 3 questions in there.

That's right. I think there's a couple of answers. So I think, first and foremost, on the tactical side of pricing, we will, as I said, I believe we're now in an inflationary period in the industry. And what we have -- the approach we've taken over the last 1 year, 1.5 year is to pass on what we have incurred in terms of cost of goods inflation. So we've passed that on. It's not -- that was never about goosing the margin, so to speak. It was more of just being able to offset the cost. But if you look at our business, Stacy, over the last decade, we've been increasing the ASPs continuously of our franchise. Why? Because we're adding more innovation value to our products. And that for us is the roots of the business model essentially. We want to innovate, do things that others have never done and get well paid for it. So you look at those 2 things, but for me, The value creation story for ADI is about the world's best innovation and collaborating with our customers in a way that others don't.

Specifically, what does that mean? Is that you're adding more software? Is it solutions? Is it more like custom work for customers? Like how is that innovation actually coming to bear?

Well, it's right across. We have 125,000 customers. We focus on the B2B market. I would say what's happening is the performance demands of our customers are increasing. So we're adding more dimensions of performance to our products. If you take a 5G radio system, we're putting on a chip now the size of a fingernail. We're putting an entire multichannel 5G radio system on that. We go from RF to bits. We have a lot of additional content such as clocking systems, for example, timing and clocking systems, power management. So the products themselves are becoming more sophisticated to deal with the complexity that our customers expect us to attain for them. So those are examples.

Got it. Would you agree with the statement that, I guess, growth by necessity needs to be a bigger strategic imperative for ADI as well as potentially for the analog industry going forward? I mean you guys have margins now gross when you just did 73%. I know you...

74%.

74%, excuse me. You got a trough that's maybe 70% through the cycle. But it's -- you're probably not going to 80%. Maybe you are. I don't know. Because of just where the margins are and just the quality of that franchise, does that mean growth has to be more important than it was in the past?

Yes, I think so. For us, and you've seen the power of the business model. The -- when we get the growth, the fall-through is enormous. The leverage is very, very strong. So that's how we think about it, that the future of the company is its innovation-driven growth. And we've reset the model, of course, at the recent Investor Day. We expect to be able to get from -- get the business from kind of 5% growth in the region to 7% to 10% across the markets and applications that we've chosen to serve.

This was a 5 -- I think it was a 5 year.

Yes.

Is that right? Okay.

Yes. The -- yes, by '27.

Yes, that's right. So it was -- yes, it was 7% to 10% or whatever it was in '22.

Exactly.

So it was kind of double-digit off of '21.

Yes.

'21 is the base.

That's right.

So I guess implicitly that -- and you're not the only one like most of the companies have a forecast like this. Implicitly, it is suggesting that you believe the 2021 level is sustainable. There wasn't like a ton of, I guess, cyclical or like nonsustainable demand that was supporting that.

Yes. We've even built into that number, the probability of a recession.

So in what way? Like how do you guys think about that?

Well, look, my sense is to be able to get this, the industry has the potential to grow, I think, sustainably at the kind of 10% level over the next 10 years. There will be a recession which will offset some of that. So in general, we feel very, very confident with that 7% to 10% level. People use nominally 8.5%. And we feel good about that. We have not only the innovation drive, our customers -- I think we're coming out, by the way. The other side of the pandemic with our customer reputation even stronger than we went into it. But we also have the synergies, the revenue synergies that we can capture from the Maxim integration.

Got it. Let's talk about the Maxim deal. So the timing on that, I remember when it happened, people were kind of scratching as it was 2020, it was the middle of the pandemic. I think as it turns out, the timing worked out pretty well. What was the driving force behind doing the deal at that point? And what is it specifically that Maxim is bringing to the table that ADI didn't have before?

Yes. Good question. So I think if you look at it from a market perspective, we have enhanced our ability to innovate in the automotive sector. We have, for example, very high-speed bus interconnectivity products, GMSL specifically. We have a lot of power management activity that serves that area but beyond as well. And one of the areas that I'm most excited about in the kind of the early days of the acquisition is the rate at which we are capturing power management stocks in new designs partnered with ADI's strength in signal channel products. So the other area from a market perspective is data center and cloud. So now we've got a bigger portfolio, particularly of power management products that enable us to serve that data center and cloud area. It's pretty clear to me as well, all the signals are that cloud is going to become more and more distributed. It will be used in factory environments more, a lot more connectivity. So these are areas where that power management portfolio of Maxim will enhance ADI's ability to capture more of the available market essential.

Yes. So what is like -- it was Linear that really got you into power. Because I know you guys have been talking about getting into power for a long time like before that.

We tried many, many tricks.

Yes. I remember like the market share was pretty stable. It was 2%, give or take, right? It's why -- these things are really -- This is one nice thing about Analog, and it just takes forever, right? It's nice once you're there. Linear got you into power and got you a major and very high-quality power front. What does Maxim add to Linear? What does Maxim bring specifically on power that Linear did not have?

Well, look, Linear was always the premier highest performance, but it was really targeted at what we call the broad mark. It was more of a catalog play. Maxim's process technologies, their design methodologies enable us to take on more application-specific power opportunity. And automotive is a very, very good example of that, integrated power solutions for areas like 5G radio systems. So it's very complementary in the sense that Maxim enables us to move across the available -- the SAM space or the TAM space in a way that LTE didn't. So we just get more SAM to attack. And we have, I would say, more competitive solutions in the application-specific areas of our business, in particular.

Got it. What are the specific areas that make you most excited about from a revenue synergy standpoint with NEC? I mean is it automotive BMS? Is it 5G radio? Is it data center? And how long do they take? How should we be thinking about -- because I always I think revenue synergies always they take a long time, especially in your industry. But how do we think about that?

Yes. But I think -- what do we know, we're 9 months past the closing of the deal.

It's been that long?

Yes, it's been that long. And where am I seeing the green shoots appear from a revenue synergy standpoint? Certainly in automotive. I think that will be one of the fastest uptakes, the more wireless side of our communications infrastructure business. And even industrial, I mean, we're being asked by a lot of our customers now to really help them solve that power problem industrial. I think the innovation cycles in industrial are speeding up. So I don't think it will be automotive communications, consumer and then industrial is naturally going to take longer given the latency in the design sectors there.

This is more than just like cross-sell, right? This is you're actually engaging on like new products?

Oh, absolutely. Oh, yes, yes.

Okay. Got it. Can you maybe talk a little bit specifically on the automotive and especially the EV. And I know you guys, you had a pretty good position in battery managed positions in BMS before the deal Maxim strengthened that. Can you maybe talk a little bit about that? And specifically, I know you guys are pushing very hot on what's on wireless BMS. You've got some other competitors that are doing some other things. Where is the differentiation on that business? How big is it today? How does the wireless piece differentiate versus like what is commonly used today? And like where is the opportunity? How big does that get like as EVs are now starting to [ play ]?

Well, when we acquired LTC and that got us the root in the BMS system through the wired harness technologies in the battery, the battery system. We thought that by the end of the decade, 10% or 15% of cars would be electric. It looks like it will be somewhere around 30%, 25%, 30% by the end of the decade. So the opportunity is much bigger than we had imagined.

Is it bigger? Is it just faster or we're just getting there faster?

It's faster. It's much, much faster than we thought. As I said, we think it will be probably 30% of cars. Their forecast, 40% of cars produced by 2030. I've actually seen as well the old wiring harnesses versus the wireless battery systems. Today, the wireless part of our BMS is very -- is a tiny fraction of the total.

How big is your BMS? You just said $100 million.

So it's $100 million a quarter now. I mean my sense is that's on a trajectory to $1 billion over the next few years.

$1 billion a year?

$1 billion a year. $1 billion a year. So I think we're in a very, very good position. We've large market share. I think over time, there will be a shift more to wireless when you see the compelling value proposition. I was at our facility in Ireland where we're working with one of the large OEMs on transferring from wired harnesses to wireless systems. And what it enables is the extraction of all this multi-wired cable systems that add weight, add costs, diminish reliability. The wireless system enables pull all that wearing harness out, and you are able to reconfigure batteries using the multicellular structure very, very quickly. So we got about twice the ASP for an equivalent wireless system versus a wired system. And over time, I think, just given the value proposition, that will become a dominant part of the BMS infrastructure.

I have a dumb question. Like there's no reliability issues with the wireless piece itself, like loss of signal or like anything like that, that's...

Well, I suppose. I mean statistically, there's always a problem. We use -- we're actually using a cognitive radio system, self-healing cognitive system that is incredibly robust. And statistically, we know that it's more reliable than a wiring one.

Okay. Okay. What else are you guys doing in automotive that you're excited about beyond EVs?

Well, GMSL, this is the gigabit Serial Link. We have the -- we've got a very, very strong traction at kind of mid- to high end in the in-cabin electronics for audio, best audio systems with the media bus, the A2B media bus. We've got 30 OEMs signed up for that now at this point in time. So that's on a steep upward trajectory. And we're adding road noise cancellation technology, active road noise cancellation technology and power management. I mean there's more and more and more power management being used in the car in general. When we move to more aggressively into advanced driver assistance, that also requires a lot of movement of data. That's where GMSL technology will play and a lot more power management. So in-cabin electronics, electrification of the vehicle, they are the areas where we're really focused on.

You guys have a point of view on like what your ultimate like content opportunity in an automobile is?

I mean it goes from -- I mean, in the low end, it's probably somewhere around $10 to -- in a very, very high-end vehicle, multi-hundreds of dollars. So it depends on mix.

I want to shift gears a little bit and talk about one of your other businesses, especially Comm. And I know Comm has its ups and downs. It seems like it's on a pretty good trajectory right now. It is not China right now. It is outside of China, North America and other areas, right?

Yes, right.

I guess what does that dynamic look like? And what are you expecting from China Comm like next year? Because you can make the argument that like it's sort of depressed at the moment. But eventually, presumably those base stations everything need to get deployed. Like how are you thinking about that trajectory?

Yes. Well, our business in China has diminished greatly on the...

You didn't seem to be seeing too much of an impact from the lockdowns and like everything else. So was it 20% of your revenue, something like that is China right now, overall.

About that. Yes, exactly. So look, for us, when we think about wireless, it is about the deployment of 5G systems, 5G+ in particularly all the regions essentially outside of China, okay? So China is not a feature really of the business anymore in 5G. That's true to a first approximation. So what I'm seeing in the rest of the world is America is on a rampage in terms of 5G deployment. Europe is now coming. Asia will come beyond that. The big question is what happens in India with 5G. And one of the signals that we're seeing as well very, very clearly over the great promise for 5G is that it becomes a key part of building out private networks and enterprise environments. That's now happening. Our customers are experiencing...

Is this the O-RAN kind of build out? Or is this...

It might even be just 5G that is configured, not necessarily Open RAN. What we're seeing is 5G being reconfigured for private environment, private networks. The backlog is building rapidly on that. And O-RAN is still on the Comm. But I think still very much in kind of outside of Japan with Rakuten, that's still pretty much in the future.

How much of the business today is like private networks versus like larger like service...

Very, very tiny. I mean it's pretty much all driven way less than 10% is private. The big hope there has been that in 5G radio systems by the end of the decade that private networks will be probably 30% to 40% of the total revenue in that sector.

I have to imagine like there's more you bring to the table in the private side like they don't know what they're doing presumably.

I'm not sure what you mean by that.

I mean if you're -- is there more in terms of expertise or anything you need to bring to the table on the private side versus like selling to a service provider.

Well, the private sector will be served by -- well, first off, when it comes to industrial enterprises, we know a lot about the edge in the industrial area. So there's potential for ADI to be able to kind of bond the edge processing technologies with the connectivity technologies. But that's being served by kind of the big 3 today who understand how to deploy these complex systems into these edge environments. So it's possible that there's a connection between what we know at the edge and what our customers are trying to do to connect with the edge that becomes useful.

How is your content like? You went from like 2G to 3G to 4G and now to 5G, like I seem to remember from 3G to 4G, it was like a 4x increase. Like maybe it's similar from 4G to 5G. But what's that content trend look like over time?

Yes. I think our calculation is that compared to 4G, 5G is kind of -- is probably a 3x content multiplier. But also, we've got power management there. This opens up more -- just more content for it. But I think on the pure radio side, the content multiplier is 3x. And then we add power to that.

What do you think the power attaches? Is it like 1:1 or?

My understanding is it's probably 3:1. So 3 signal chain, 1 power, something like that.

Okay. And that's all fairly new?

That's all -- for ADI, that's pretty much all new. Yes.

Got it. Got it. How much of the business today in Comm is wireless in 5G versus like the wireline? Because people tend to, I think, focus on 5G and they sort of ignore the rest of it.

Yes. Well, it's a good question. I mean we have a very solid business, particularly in serving optical cloud infrastructure, for example. In the last quarter, the wireline business, which is largely optically dominated, optical dominated, that was -- they were pretty much neck and neck. So consider the business in total to be around $2 billion, and it's roughly becoming half and half now.

Does the wireless -- does the wireline piece grow like the wireless does? Or is it more stable?

It has been the -- I would say, the optical controls we build, we actually don't really play in the data path, the electro-optical interface. But we do play in the control of those electro-optical interfaces, be they in metro networks, long-haul networks or within a data center. And that business has been a terrific growth driver on the wireline side for ADI, in the kind of double digits over multiple years.

Okay. And I forgot what was your target for Comm growth longer over the model period?

We think about 10%.

Okay. Okay. Got it. Let's switch over to Industrial, which is your biggest business. It's mor than half the revenue. Now this is what I always think -- I always say like Industrial is not an end market. It's like hundreds of end markets, right? So how do you guys think about it? Like how do you actually sort of parse out your Industrial business?

Yes. So we've got 4 basic components to the industrial sector. They're all roughly about the same share of the total. So as you said, half the business of ADI's business is industrial. So automation is a big piece. So that's factory automation, robotics, factory floor configuration.

[ Semiconductors ] or is that in a different...

That's different. So that's coming. So that's one part. So businesses that serve pharmaceutical manufacturing, food manufacturing and so on and so forth. And we have many, many thousands of customers there. The next piece is instrumentation, and that has 3 components to it. It's automatic test equipment for testing semiconductors, displays, et cetera, et cetera. And the other piece -- the other 2 pieces are electronic test and measurement, signal generation, lab equipment and serving the scientific research area, too. So those are the 3 components of what we would call instrumentation. So again, many, many hundreds of customers, tens of thousands of our product SKUs involved. Very long life cycles. The next piece is aerospace and defense. In spite of the fact that the avionics piece of that has been really crushed over the last couple of years, that business has been holding its own. I mean it hasn't grown as we had expected. But the defense part, of course, has seen an upsurge. And the space satellite side of it also has been growing, great content, good growth.

You guys are benefiting from these cloud -- these satellite clouds that are getting launched like Starlink?

Exactly. Yes, everything from planetary monitoring to surface monitoring from satellites to communications by satellites, et cetera, those things are growing. LEOs, the low earth orbit satellites are growing very, very well. It's really good content story for ADI. The fourth piece, yes, the fourth piece is health care, digital health. That business now is climbing towards $1 billion. I think it's around $800 million right now.

You guys start to split that out? Like auto, way back in the days used to be part of the industrial business till it got big enough for you to...

Yes. We get that question a lot, Stacy. It's getting to the size now where it's really meaningful. We're a $12 billion company. This thing has been growing double digits. And it's one of the best bets that we're making. It's very modest in terms of the investment it takes, uses. A lot of the technologies that we use in our industrial business are used in health care. So my sense is that will continue to grow double digits into the future. So that's a smaller piece. That's today about 8% of ADI's total revenue, but highly profitable, very diverse. And there's a lot of new modalities that we're bringing to bear, new innovations. So that's the industrial business in essence.

Got it. Got it. So I guess there's -- everyone always talks about automotive and content increase. I mean there are similar stories, I would say, peppered through the entirety of the industrial portfolio. Maybe it's a little harder to think of, like I said, it's not a single end market that you track. But I mean do you think about the content opportunities industrial similar to you do in auto and some of the others?

Yes, absolutely. I mean if you look at -- why are we saw bullish about automation, instrumentation? Well, because there's -- if you take automation, there's more and more compute density. The fusion of what they call information and operating technologies. The intelligent edge, more compute, more connectivity. And any time there's more computing required, there's an opportunity for ADI because we play at that intersection between the physical and digital worlds. So our job is to produce the data that others are able to operate on from a compute standpoint. And power management. We're underweight in power management, for example. I think in all those different sectors, in the industrial area with the exception of the broad market where the LT portfolio has been very, very strong.

Do you think you're taking share in power management, by the way?

I would say we're holding our own. But the -- our expectations are that we should be able to bend the growth curve to a greater extent. Now with the breadth of the power portfolio that we've got from LTE as well as Maxim combined. So on the catalog side, but also these application-specific sectors that I mentioned where the Maxim portfolio is better attuned.

Got it. I want to shift over now to some of the operating questions. In particular, the manufacturing, the hybrid manufacturing model and the impact on sort of like margin resiliency like maybe like [indiscernible]. So can you talk a little bit about what you're doing? Because some of your peers are doing the -- TI is on one extreme. I'd say NXPs maybe on the other extreme. You guys are kind of sitting in between. You're doing some interesting stuff in terms of licensing foundry processes so you can move like wafers back and forth as needed. Can you talk a little bit about that strategy and what it's bringing in terms of resiliency and flexibility and everything else?

Yes. I think that's a good question. We've been using a hybrid model for 30, 32 years now since we first engaged with TSMC, I think, back in 1989, 1930.

You use almost every process that TSMC delivers, right? I mean they're...

Except the most advanced one. So everything above kind of today, the most advanced node we're using is 16 nanometers. But most of our business sits in legacy nodes, particularly the industrial and precision measurement business. So we have been able to build the model. So today, 50-50 is the way -- when we think about silicon manufacturing, about 50% inside, 45%, 50%, depending on the business mix, 50% through foundry partners. And...

Did you say how much was internal right now?

It's about 45%.

45%. Okay.

We're Around 45% right now, okay? And we've doubled the -- we've increased the investment in our internal fabs at 180 nanometers and above, where a lot of our business sits. So by the middle of '23, we'll be ramping up our Oregon fab.

Okay. [indiscernible].

Yes, 180-nanometer fab there, doubling the output of that, doubling the output of our fab in Ireland by kind of the early part of -- late part of '23, '24. So that makes us more internally sourced.

What will your mix be at that point you think?

Probably 60-40, 60% internal, 40% external. And over time, that will probably increase. We have the benefit. One of the reasons we've been able to grow the company at 28% roughly in '21. We'll grow over 20% again this year. Some of it was pricing, but being able to leverage external partners when demand surges has been a very, very important part of managing our supply chain and our customer service to our customers. So we'll continue to use that hybrid model. And we cross -- we keep recipes inside ADI that we can also acquire externally. If and when demand drops, we manage then utilization more effectively and inside the internal fabs. So it's a very, very good model. And we intend to follow that model down through the process nodes.

Got it. You just said you're going to grow 20% plus this year. Was that a consensus number, by the way? Or was that -- you guys haven't given guidance for the year?

Well, it is now. It's -- no, I think that's what we're expecting this year.

And again, I'm not sure where consensus is. Probably sitting around there. I have to go look at my model. So you talked about a 70% trough gross margins like even you were saying. So that was -- I just want to make sure I understand that was on a trailing 12-month basis. Doesn't say that you're going to have a quarter that might go below. But in the trailing 12 months, you think you can hold over to 70%?

Yes, we do.

Got it. And so I guess the way to sort of think about this hybrid nature, you're almost kind of using the foundries like as a volatility sync in some sense.

It gives us resiliency. It's a shock absorber essentially in the business. And we've used it very effectively over multiple years. And the other side of this is one part is kind of a tactical operation. But we also get access to some of the best process technologies in the world that are being produced. And that's one of the factors in our thinking as well in bringing process technology back to Oregon. We'll have legacy Maxim 0.18 micron. But we'll also have the legacy 0.18 micron that ADI has been acquiring through foundries. So it's -- that collaboration, I think, has great power in terms of leveraging existing new process technologies, existing process technologies as well as, as you said, being able to manage volatility.

Got it. Do you guys benefit or will you benefit in Beaverton from any of the potential Chips Act or like subsidy regulations assuming they ever get passed.

That's the big question. We're not waiting, but we hope so. We hope so.

There's no reason you shouldn't qualify at least for something you're building here in the U.S.

Absolutely. Yes, U.S. and Europe. I mean the Europeans also have their own version of the Chips Act. And both of these regions are very important to ADI's manufacturing strategy.

Yes. How much of your manufacturing footprint in Ireland now, by the way, versus...

It's internally...

You guys have been there forever, right?

Yes, pretty much forever. Yes, we've been in Ireland since mid-70s.

You grew up at ADI there, right?

I did. I was an intern at ADI over 40 years, which I shudder to think about. But Ireland today, I think, is about -- of the internal output is around 30%, somewhere like this. It's about a 1/3, 35% of our total output internally.

That makes sense. What about on the OpEx side? One thing I've been wondering just in general for semi companies is wage inflation. And most semi companies and storage, they do get leverage and they tend to grow OpEx like less than revenue. I guess how are you guys thinking about the operating plan for specifically this year, especially like just given what's going on with -- again, you've already kind of given like the longer-term operating model and thoughts. But is wage inflation is an issue for you guys for, I mean, just more broadly looking at that...

I think, Stacy, I think it is for everybody and it has been for ADI. But we've already built a significant inflation into our salary build for this year across the globe. So how long will that last? My sense is it's not a long-term facet. At some point in time, a more real wage environment is going to reappear here. But it's already factored into our thinking for -- certainly for this year, it's already in the budget. It's in the run rate.

Got it. Got it. I want to shift to capital allocation. So this has been another change in the wake of Maxim. And I always look at the stuff that's -- people used to look at TI, and they were returning 100%. Then you guys were doing M&A. And I always sort of feel it's more philosophical debate. It's like who should be making the decision on how to invest those excess dollars? Is it the management team or is it the shareholders, right? TI and even NXP and others have just, you shareholder, you make the decision. And you guys kind of made the choice. And I think those choices have worked out very well. Don't get me wrong. But you're making a shift now. And post Maxim, you've got a leverage target. And now it's like every incremental dollar, 100% of free cash flow gets returned to shareholders. Like why is it? Is there just -- is the portfolio full now? You've got everything you need? Is there nothing left, at least, in -- maybe there isn't anything left in pure play that you want to buy. Like what's actually driving that shift?

Well, I think, first off, the belief in the business model that we can generate very, very rich cash flows. We are sitting at a pretty low leverage rate right now, leverage level.

Is that going to come back up? Like I think the target was 1.5 but you're below that now.

We're below that now, yes. So -- but we're -- we can take on more debt as a company. But to your -- there's a few questions in your question. We have, right now, we've got the 4, what I would consider to be the 4 beachfront properties in the world of analog under the one roof. So I'm very satisfied with that.

It's ADI, Hittite, Linear, Maxim.

That's it. And what I really want to do is make sure that with the opportunity available to us that we leverage, that we just get -- we squeeze all the available opportunity out of those 4 franchises. So when we think about -- we do make smaller acquisitions. We do tuck-in acquisitions that people don't hear about. But certainly, on the analog side of things, I think we're very well situated right now organically from here on.

Okay. What about outside the analog? What about -- you guys have a small DSP and processor business. I guess TI would call it embedded. Anything there that you expect from...

Yes, we have a multi-hundred million dollar DSP business. We actually use -- I mean if you take our 5G radio systems, the latest versions of these things, we had -- we have probably 25 MCUs that we use in these. So there's more digital content, particularly in these more vertical applications. And so we have a digital heritage as a company. And we've been adding more algorithmic capability to the franchise, and we'll continue to do that. If we need to enhance that with acquisitions, specialty acquisitions, we'll do that. But I don't foresee anything major in that at the moment.

Got it. We've got a few minutes left. We've got a couple of questions. You want to go to the lightning round?

As you wish.

What are your broad thoughts on the current China demand situation?

Well, it's holding up. I think it's holding up. We're not seeing any great impact right now. I think we said that at the earnings call a couple of weeks ago. So...

And to be fair, you don't have tons of consumer demand in China.

That's correct. That's correct. Yes. I mean our business in China is really industrial and automotive.

Got it. How much of your revenues are direct versus shipping into the disties channel? Where do you think that goes?

I think it's around 50-50 right now. Where does it go? We're always looking for efficiency. I mean it's a case of -- we give our customers the choice. They want to buy through distribution. That's fine. But there's a cost associated with it. But I mean, I'm happy with the channel structure right now. We've been increasing the size of our own sales force through acquisitions, acquiring more and more field applications resource. So increasingly, we're pushing our technology coverage further down the customer pyramid. I think we cover now about, as I said, we've got 125,000 customers. Most of them we will never see. So we deal with them digitally and through the channel. But we're covering about 4,000 customers directly at this point in time. And I think that balance is about right.

And that's about 50% of the revenue with those 4,000?

That's probably about right.

How many customers do you have again?

We have somewhere in the region of 120,000, 125,000 customers. So it's -- and with average product, we have 75,000 product SKUs. We have -- we have average product life cycles over a decade.

You used to show that chart sometimes of like the revenue breakup by age. There's always that split...

Vintage, still vintage.

Yes, 5% or 10% of revenues like 10-plus years old.

I think we showed that at the investment Day. That's the old vintage chart. And that is one of the great strengths of this franchise. Once you get the products designed in, you got this recurring revenue for a decade plus.

I love that chart. How does the revenue model work with our software and the integrated solutions?

Very well. I mean we're adding more software content. I mean if you look at our 5G radio systems, I said 25 MCUs. We're probably pushing the ASPs of those products by 30% to 50% through the addition of more algorithmic technology. So it's meaningful. It's meaningful in the business.

Got it. So Vince, we have 1 minute left. Here's where I will give you your soapbox. You've got a room full of folks here. Why should they buy ADI stock?

Well, I think, first and foremost, if you look at the values of this company, we like to do things that nobody else has done. I mean this industry has been endlessly innovative. We've played at the edge of that for the last 57 years. I believe our best days are still ahead of us. We have -- we're spending $1.7 billion in engineering. We have -- I think there's a tremendous asymmetry as well between what customers are capable of doing with analog technology and what we -- what they need in terms of analog technology versus what they can do. So there's more reliance on ADI. They're asking us to do more. And this, as the intelligent edge becomes more and more of a facet of the world of information technology over the next decade, we're very well positioned as a company. So we're doing things nobody else has done. We've got the technologies, we've got the innovation and the customer relationships in a business with tremendous resiliency in terms of product life cycles.

Got it. And with that, I think that's as good of a place to leave it as any. We'll leave it there. Vince, thank you so much.

Thank you, Stacy. Thank you.