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

Okay. Great. Good morning, and welcome to JPMorgan's 15th Annual U.S. All Stars Conference held here in London. My name is Harlan Sur, I'm the semiconductor and semiconductor capital equipment analyst for the firm. Very pleased to have the team from Analog Devices here with us today. Rich Puccio, Executive Vice President and Chief Financial Officer. We also have Mike Lucarelli, Vice President of Investor Relations and FP&A here with us as well. So for those of you that don't know the Analog Devices' team, leader in performance, mixed-signal RF analog semiconductor solutions. Strong position in power management and signal chain processing both digital and analog, which, as we know, is a technology that bridges the real world to the physical world. Best-in-class gross operating, free cash flow margin. Strong capital return program. Very diversified business, right? Industrial, automotive, comms infrastructure, 85% of total revenue. Rich and Mike, thanks for joining us this morning.

Good morning, everybody, and thanks for having us, Harlan.

Great. So if we rewind back the same time last year, second half of your fiscal '23, team was already in the midst of the semiconductor industry cyclical downturn. You're driving about 9% year-over-year declines in the second half of last year. From there, the business continued to drive lower. You troughed in the April quarter of this year, with peak to trough and year-over-year revenue decline of about 34%. Since then, right, the team has driven positive inflection in quarter-over-quarter revenue growth, your year-over-year compares are improving as well. Take us through the dynamics over the past year and, more importantly, your view on the cyclical dynamics in the business going forward.

Sure. So -- and we talked a lot about this. Obviously, we've gone through one of the largest inventory corrections we've seen. I think this is, for ADI, the second largest correction. The only time larger being -- during the dot-com downturn. So the correction, as we've talked about, we feel like the correction is large -- of inventory correction has largely happened across most of our businesses. We've talked about, except for auto, we're still seeing a bit of a correction. And if you look what we're seeing from a positive signs perspective, if you did look at our most recent results, so Q3, we delivered an above midpoint quarter. We also guided for 4% of incremental sequential growth. So we feel very positive about where we're starting to see. Look, we we've talked about this. I think the broader pace of the recovery is going to continue to be dictated by the broader macroeconomic and geopolitical issues as we look forward. But one of the things we've also talked a lot about is we have clearly been under shipping to demand and our customers for at least a year, so that gives us some confidence. And as we look into '25, we could see a strong '25, and get back on to our long-term model that we described back in the 2022 Investor Day, so in that 7% to 10% growth range.

Last -- back last year, the Analog team has I think, what, Mike, this is your third or fourth consecutive year, right, that the team is presenting. Back last year when we hosted Vince, he was already talking about stabilization in order rates, right? The team then drove 3 quarters of sequential improvements. However, in July, you did see a slight decline in bookings with growth in all segments, offset by a decline in automotive, book-to-bill at parity exiting the July quarter. You're midway through this quarter, have the order trends ex auto continued to improve? And you've said recently that you've seen an inflection, a positive inflection in automotive orders, has that continued so far this quarter as well?

So what we've seen on orders and as we mentioned, a continuing increase across broadly other than auto. On the auto side, what we started to see as we went into the summer months is our order rates started to come down on auto. We did start to see them pick back up as we get to the late part of the quarter, and that has continued quarter-to-date. And the trends we were seeing in the non-auto parts continue from a growth perspective. We continue to be a little bit softer in the automation segment of industrial. But as we talked about, we're -- we have seen lower reductions than we saw in the prior period. So we feel like we've -- that we're on an upward trend on the bookings side. And we've got a number of tailwinds, we think, behind us from a secular perspective that will help us continue.

So you're continuing to see non-auto order trends sort of continuing to improve sort of quarter-to-date. Automotive, you saw the negative inflection in June, July, but you've seen the positive inflection since then, that's sort of continued quarter-to-date. Book-to-bill, I know you guys exited book-to-bill in the July quarter, roughly at about 1%, right? Non-auto bookings being slightly offset by auto. Looks like both of them are moving in the right direction. So would you say book-to-bill kind of still tracking towards 1%, maybe slightly above 1% so far quarter-to-date?

Yes. And it's interesting on the auto side, it is also mixed. And I think we've talked about -- we've had 2 strong -- 2 consecutive strong growth quarters in China from a growth perspective, but we're seeing offsets being weaker. Now particularly as we see in the auto space, the forecast for the back half of the year is for volumes to decline relative to the prior guidance. And there is a substantial portion, about half of our auto business is tied to the legacy auto and volumes. And that's why we think that this inventory correction could go on a little bit longer on the auto side. And I think we'll see it certainly into Q4 and probably into Q1, but we do still see an opportunity for growth in '25.

So as you've talked about sort of the quarter-to-date continued improvements in automotive bookings, there is still some inventory correction upside going on with your customers. So what's driving the positive dynamics if you take your auto business in sort of as a whole?

Sure. So as I said that the most challenged piece is the legacy piece is auto. The other area, which we've talked about now for about a year as we've had some pressure on the BMS space. We are starting to see some -- we've seen some design wins in the BMS space, which is positive for us. But if you look across the other parts of our business that are tied to the EV world, so if you think about our GMSL, our A2B and our functionally safe power, those parts of the auto continue to grow double digits. So that is offsetting some of the downward pressure on the volumes. And also, we get this question a lot, is we've seen a much shallower peak to trough in the auto than we saw in the other business. I think a part of that is, one, the continuing growth, right, although we talk about the slowdown in the EV markets, they're still growing, they're just not growing as fast. So that's going to be an important part of the dynamic as volumes start to recover and stop being a drag against the growth parts of our business, that's where we'll see the upside.

And to the credit of the team, and I think you said this in answer to the first question. But in terms of how did we get to where we are today, to the team's credit, I think you guys have been shipping -- under shipping your customers' demand profiles for a number of quarters, right?

Yes. Yes. I mean we certainly have been under-shipping for a year. And you can see that, right? We've been super focused on managing the inventory, both on our balance sheet as well as the inventory in the channel.

When you look at the overall business, what are you seeing from a geographical perspective? You particularly called out broad-based strength in China in the July quarter. You had some commentary about positiveness in automotive as well out of China. But how are you seeing the business from an overall geographic perspective? And is China still, broadly speaking, sort of strong quarter-to date as well?

Yes, I think China continues to be strong across all the end markets, including in auto, which we've talked about. Certainly, Europe continues to be the weakest for us in the industrial there, and obviously, it's tracking pretty similar to what the PMIs have been doing in Europe, as we've seen PMI soften over the last couple of months. And obviously, the broader macro in Europe is weaker. And then relative stability compared to Europe and the U.S. and the rest of Asia?

Analog has done a really good job, like I said, of shipping below your customers' consumption levels over the past 3 to 4 quarters, both direct as well as your channel customers, right? You exited July with 178 days of inventory on the balance sheet, that was down about 7%, 8% sequentially. Do you anticipate further work downs of the inventory this quarter? And you've also been extremely disciplined on channel inventories, driving them towards the low end of your target range of 7 to 8 weeks. Where do you see that trend in this quarter as well?

So I give a lot of credit to our operatings teams for focus on inventory, both on our balance sheet and the channel. I think we've taken out, since the peak, about $300 million of balance sheet inventory. I actually think that, that will remain relatively stable here in the next couple of quarters. Certainly, one of the things we learned during the supply fracture and the subsequent rebound is the importance of maybe keeping a bit more inventory on our balance sheet. We're also being very smart about how we keep it, a lot of the inventory is being kept at a die bank level which gives us a lot of ability and also helps us manage our cycle times as the demand does start to return. So I expect our balance sheet inventory to stay relatively where it is from a dollar perspective and as we continue to see growth, we'll see days come down. On the channel side, we talked about this, very disciplined to get back down to the low end of our model. We talked about it. If we continue to see positive signs, we'd start shipping to end demand. We do expect near term that the channel inventories will remain relatively flat to where they are. Obviously, as we see increased growth, we might have to ship more -- start shipping bring more and the current plan is to keep that relatively flat in the near term.

Got it. So putting everything together, right, and given your 13-week lead times, the team had qualitatively described the forward view that the January quarter was likely to be a seasonal type quarter, right? Revenues sort of mid-single digits percentage sequentially, with the seasonal pickup in the April quarter. And as you mentioned in your prepared remarks, sort of overall strong sort of fiscal 2025. Is that still how you kind of see the profile of the business looking forward?

Yes. So you nailed it, right? So with the lead times back in the 13-week period, that means we tend to have visibility out of the way, right? So we don't have a ton of visibility yet on Q1. Could Q1 be higher than seasonal? I mean it could, right? We've been higher than seasonal 2 quarters in a row, but we don't yet have an order book that would tell us we'll be above seasonal. And so the historical pattern is sort of mid- to low single-digit sequential decline in the seasonal quarter. So that's what we've been talking about, only because we don't have a longer-term signal there. But we do still feel that the growth opportunity in '25 for the full year is strong.

Perfect. Before I move on to some of the more mid- to long term focused questions. I want to make sure that we give the audience an opportunity to ask questions. If you have a question, raise your hand, and we'll get a mic over to you.

Interested to know -- congratulations on your new role. Things have changed a lot in the last few years since your Investor Day when you were as a prior CFO in your role, and I'd be interested to know what part of that framework -- and I think you talked about 15% EPS as a potential target in the future, what part of that framework that was laid out at that Investor Day is relevant still today or not relevant?

Great question. And I actually spent a fair amount of my first couple of weeks with Mike going through the Investor Day model to make sure that I was comfortable that we could execute against that, and continue to do that. So I talked a little bit about how I feel about the 7% to 10% revenue. 7% to 10% revenue is still the right way to think about it. Even if you just took the historical CAGR of the industrial business and add in some of the tailwinds we've created, I feel good about the 7% to 10%. Again, given our flex capacity and what we demonstrated from a margin perspective, obviously, we did break the 70% floor, which we had talked about in that model. But I also know at the time we built that model -- that's the Royal Week. The time we built that model, we certainly didn't anticipate the severity of the trough that we're going to see. But the ability to hold to a high 60s margin at the trough of our cycle, we feel very good about that. We were disappointed to break the 70%, but we feel very good and give us even more conviction about the agility of our model in both the up and the down. So I feel good about that. Still feel good about where we're headed on op margin, right? We're going to -- again, at the bottom of the trough, we're going to -- we've stated a outlook for the rest of this year, we're looking at a 40% op margin in the trough year. So we feel good about getting to the long-term margin range that we talked about. The one piece that I think is worthy of note is, obviously, given the severity of the drop and the lower base we're starting from, I think we had said getting to a $15 EPS in '27 I think was the original model, I would say it's more likely that that's '28 not '27, just given how deep the drop was from peak to trough coming out of that. But otherwise, I feel very comfortable with our ability to execute against the long term model. And we continue to be following our -- and this is one on our return on capital policy, with 100% going -- free cash flow going back to investors over the long term. I think post Maxim, where -- including last quarter where we were under the 100% threshold. We're still at about 110% of our cash flows, free cash flow has been distributed. We've increased our dividend pretty significantly and share count by about 8%. So feel pretty good about where we're doing against the long-term model.

Any other questions? Now the good news is that I think The Street agrees with you that the severity of this downturn did warrant probably the team getting back to more of a $15 type earnings power target in fiscal '28. So the good news is consensus is sort of centered around that fiscal '28 time frame. But to your credit, right, looking back over the past 20 years, I mean, the Analog team has grown their revenues at a 9% CAGR, right? You're targeting 7% to 10%. Your earnings and free cash flow per share over the last 20 years have grown at an 11% to 13% CAGR over that time, too, right? Some of it inorganic, but most of it organic as well. And then to the team's credit, I mean in the peak of the last cycle, you guys were already driving $11 of annualized earnings power. So it feels like if we are emerging from this downturn and a few years of sort of relatively good growth combined with some of the product cycles that we're talking -- the $15 of earnings power certainly seems within reach over the next few years.

Yes, I agree. And I think one of the things that's important is, and I alluded to, so I'll give you a little bit more detail on it. My thinking is sort of bending that historical growth curve that you described and getting up into that 7% to 10% range. And if you think about what's happened in our space, go back to -- for us to '22 coming out of the pandemic, significant tailwind from pricing in '22, another year of pricing tailwind in '23. '24 has been relatively stable from a pricing perspective, and we expect '25 to be stable. So if I just take The Street has us at a 10% for year -- next year. We think that the ability to maintain that price versus the historical practices of giving that back is worth about 1 point to us. I think the significant number of concurrent secular tailwinds, whether it's in automation, aerospace and defense, AI. The Industry 4.0, we think those combined tailwinds are worth about another point of growth to us. And then the final piece is at the time of the Maxim acquisition, we talked about the synergies we generate, and we expect to have about $1 billion worth of revenue synergies by 2027. So you think about those 3 factors as about a 3-point step-up in sort of the historical curve, which is how we get comfortable and how I get comfortable with where we're headed from an EPS and a free cash flow perspective.

And I mean, we always look at a strong indicator from our perspective of forward revenue growth profile is the design win pipeline, right? And you grew your design win pipeline by a double-digit percentage rate in fiscal '23, across all of your end markets, right? So how is 2024 tracking so far relative to that number? And what areas of your portfolio or end market exposure are you seeing the strongest expansion and revenue opportunity as you look at that sort of forward pipeline?

So we are continuing our strong design win. And you're right, that the best look at our sort of -- depending on market, right, as the design cycles have shortened in a number of places, even the historical data center design cycles have gotten significantly shorter. So I'd say that the design win is a look out for the 1- to 3-year growth period. Now we continue to see growth. We are growing again in double digits in '24, and actually, we're seeing some really good strength in the auto design win space. And we talked about that, I think we've talked about it in a couple of prior calls, getting design wins in at 2 more of the largest companies, we've gotten a number of design wins in China with one of the larger new entrants in China. So we feel very good about where we are from a design win perspective.

Perfect. Maybe a question in the crowd.

Just to clarify, so in '22, you said long-term target growth 7% to 10%, on revenue base $11.2 billion. Obviously, peak to trough revenue has come down. So how should we think about the 7% to 10% on what base?

Yes, I can grab that. You're right. So I think what Richard was outlining was the targets, the 7% to 10% growth, the operating margin profile, the returns are all good metrics. Using '22 is a base year is going to be tough, because that was kind of in the upswing cycle which is a huge inventory build on top of that. I think if you think over the long term, this business should grow 7% to 10%. They're off mid- to high 40s, up to 50% operating margin and a lot of free cash flow. And what base year, I think is the base of your question of what's a good year to start from? I think if you want to -- honestly, if you want to look back and say there's a lot of noise in '20, '21, '22, '23 -- sorry, '19, '18. 2018 to 2019 as a base year and you go off there, you look at the trend line, you can even see how far we're shipping below that trend line today. And that's what gives us optimism that we have a good year in '25. And we're also not far off from that bogey of $15 of earnings. Note, in 2027 it's very hard to do. There's no reason to think we're not too far after that. As you look at that base year of '19 revenue and you just grow from there, you see where we went to, where we are today, and the future growth of this business is what gives us confidence.

Any other questions? Let's focus on your industrial business, right, 45%, 50% of -- closer to 50% of total revenues, composed of a set of very diversified segments, right, across different end markets. Factory automation, health care, instrumentation and test, energy infrastructure, aerospace and defense. Help us understand the sizing and growth of the different subsegments as the team moves through the potential upturn and on a go-forward basis? What of these subsegments are likely to outperform going forward?

Sure. So just broad strokes, if you think about our Industrial business, the instrumentation and test part of the business is 25%, probably a little bit more than 25%. The automation part of our business is about 25%. If you look at the aerospace and defense and health care businesses, that's round numbers about 15%-ish of our business. And then if you look in the -- at energy is probably in the mid- to high single digits, sort of the rest is other. And as we talked about, we're continuing to see growth in all of the end markets in industrial with the exception of automation. And so we've talked a little bit about the activity we're seeing in AI-related, high-bandwidth memory and tests, that's significant -- as a green shoot on the aerospace and defense side, we are -- have a number of design wins there ramping. And obviously, with the global macros, increases in defense spending, we feel pretty good about where we're going to be on the aerospace and defense side. And yes, those are the big green shoots like at this stage.

I think and you look at kind of the business, like he said automation is weak, but there's a lot of trends in that business that will propel it to growth. Maybe not this year. Next year, I think we'll start seeing it. But over the long term, that's a very good growth market for us. And the other one we don't talk much about, I think, the energy franchise in industrial. Energy for us is about renewable energy, about distribution and transmission of energy. As you think about EVs, AI, all this consumer renewable energy, you're going to need an upgrade of the grid, I think what you'll see is that business today, Rich pointed out, it's like 7% to 8% of industrial. That's probably one -- it's small, but probably one of the faster-growing areas of industrial over the next 5, 10 years. And you'll probably hear us talk more about that over the next couple of years as we build that design win pipeline.

What is going on in the automation side as your customers, obviously weak right now, not a surprise. On a go-forward basis, obviously, a lot of new manufacturing programs being dwelled in by your customers over the next few years. Automation is extremely important. When I think about Analog Devices, I can think about things like robotics, I can think about things like -- if I look at what Maxim brought with their programmable logic control and your signal conditioning, a lot of good things happening on that front. But when we think about automation, what are some of the sort of key sort of new opportunities there for the team? Is robotics really kind of the biggest opportunity?

I think robotics is one of the biggest opportunities. We're continuing to see advancements from the fixed-time robot to the autonomous mobile robot, to eventually a more humanoid type robot performing incremental functions. But -- and so we're very confident because we've got a lot of content in all of those places. But a little bit of what's happening on the automation side is just broadly the industrial CapEx is down, right? And so look, it would be great to see China pick back up because a lot of our non-China customers are shipping a lot of their automation equipment into China. So as the broader economy improves, we'll see some growth. But I do feel like we're very well positioned, because as you mentioned earlier on, Harlan, it is about the physical real-world signals and converting them into actions through the automation process that's going to be valuable and we have tons of content in that space, I think.

Let's turn to automotive. 30% of your revenues. We did discuss the profile of the business over the past few years. Orders improving first half, a little bit of a step down in June, July time period. You're seeing the order inflection back again in automotive. So that's a good trend. When -- and I think you did mention this, but when do you think this segment actually bottoms from a revenue and shipment perspective? And how do you think about the segments that have been negatively impacted the most versus segments that are doing better, given your leadership in areas like connectivity, right, both ADAS, in-cabin connectivity and power management?

Right. And look, I think our view now is that the downturn continues into Q1. I'm optimistic that, that could be an inflection point for us, but we don't have good enough visibility for me to say that definitively, Harlan. But again, on the parts of our business that are growing, we continue to have really strong double-digit growth across the parts, the A2B, the GMSL and the functionally safe power. And on the -- just as we think about the broader auto, right? And I sort of carve it up into the 3 obvious pieces ICE and your plug-in hybrids or your full EV, right? Regardless of which platform they're in, we have a lot of content, because even your cheapest ICE vehicle has microphones, cameras, and needs connectivity for all those systems. So that's positive. But obviously, we get a bigger and bigger benefit on auto as you move right. So we get a little more content when we get to the plug-in hybrid and we get the most content when we get into the full EV. There's an interesting dynamic that's been happening in the last couple of quarters, the plug-in hybrids are growing significantly faster than the full EVs. So that is a bit of a headwind in the moment just because we have much higher content, right? The BMS is a big value add for us in the full EV, and that's not as critical in the plug-in hybrids. However, we are still in the camp that we are going to a full EV world. We're still only penetrated -- I think the industry analysts say, we're penetrated 18% in EVs and could get to 30% by 2030. So we still think that, that's a great long-term growth opportunity. But near term, obviously, there's broad pressure on vehicle units.

When I look at the segments that are doing well, A2B, GMSL, functional safety. I think you guys said and continue to say that, that business is driving strong year-over-year growth dynamics. What portion of the mix is that of the auto business right now?

Yes, sure. If you look at -- so the growth areas you outlined are about half the auto mix, half. So it's interesting, if you look at it -- and I get the question all the time, why won't auto as bad as other markets from peak to trough. And it's that content piece, that 50% that's still growing. If you look at the other half of auto, we call it the production part, that's more tied to SAAR production. That production part will be down over 30% based on our outlook. So it is similar to the other parts like industrial and consumer, but you have the other part that's lifting up that peak to trough, the content piece. So we've digested the inventory between this quarter and next quarter for the SAAR component. And the other part is still growing. Why? Each car every year has more content, more radars, more cameras, which needs more connectivity, needs more functionally safe power. We have new wins coming to market. So that's what gives us comfort that we're pretty much at that trough in auto, too. And yes, it got a little softer over the summer, but it's not falling off a cliff. It got softer, right? And as Rich pointed out, things got better from there. Yes, it's not as strong as it was 3 months ago. But it's not continuing to fall, it's also a good sign.

Yes. What are you seeing in the automotive business from a geographical perspective? Europe, North America, Asia, China?

Yes, so I think I mentioned, it's been strongest in China. We've actually seen 2 straight very strong quarters in China. And then obviously, we're -- it's softer everywhere else, right?

Yes. Any questions from the audience on industrial and automotive?

It'd be interesting to know your -- as you think about the future revenue growth rate of the company, the 7% to 10% you laid out, and you mentioned kind of 300 basis points of kind of help you'll get versus history. Are there any areas we should be putting a minus in front, markets that might not have developed the way you thought or yes, areas have become more commoditized or something that just is not trending? Is anything coming out of the bucket effectively?

I don't think anything is coming out of the bucket, but we've talked about this in a number of forums. The one thing I will continue to keep my eye on, just from a pricing perspective, is the continued increase in capacity that we're going to see from our domestic competitors and the increases in China investments. However, my counter to that is we feel like we're very well positioned. We are not in the high-volume ship-as-much silicon game as possible, right? We tend to go for the high-value complex areas where we need more design and Analog expertise to solve those problems. So I think that we're well positioned and we continue to win even if this is where we are a bit higher priced. But -- so I don't have anything that I think is growing in a worse way than we expected. I just think we have to continue to watch, because the pricing pressure is going to be most challenging in China and in auto for us.

The only area, I would say, wireless communications is much worse than we thought 2 years ago on the 5G standpoint. But that's what good about ADI, we're so diverse that, that is definitely weaker than we thought. But we didn't envision AI 2, 3 years ago and the wireline piece. I think the wireless part growth comes down, the wireline piece comes up, and you're probably in the same spot. That's why it helps being diverse. You get your goal, we put 10 to 15 growth drivers in the business, we'll be right and wrong in some of those. Some high, some low, but that's what gives us that confidence of the 7% to 10% is there are so many different growth drivers that will build up the 7% to 10%. It's not one thing for ADI, it's multiple things that drive that growth.

We have a question over here.

Post design wins that you've seen in China, can you just give us a bit of a sense for what you're seeing in terms of the credibility, the local competition in Analog and how hard fought those design wins have been more recent?

You just said how hard, they're always hard. Even before geopolitics, design wins are always hard, whether it's China, Europe, North America, that hasn't changed at all. And what gives us the most confidence, I mean, we get a lot of questions on China as we should, is our design wins in China continue to grow, which gives us good confidence that, that business will continue to grow in the next few years. The design was won't tell us what happens in 5, 10 years from now, but the design win pipeline that it keeps expanding in China and globally is what gives us the confidence that, that business will continue to grow.

A good example, and we've talked about pressure in the BMS space over a period here. We have actually gotten incremental design wins in BMS in China. Again, hard fought. And I think I've said this before, the most difficult price challenges -- challenging environment is clearly in China, but we are continuing to win and we are continuing to get it in some of the largest manufacturers in China.

I guess the question, to your point, we always do get questions relative to the China domestic competition, right, for the analog and microcontroller and broad diversified semiconductor companies. Maybe you can provide us with the profile of your exposure to China -- Analog's exposure to overall China domestic consumption. And which portion of that portfolio is really subject to kind of the more commodity segments of the market? My sense is it's a very small part of the overall business, but I'm not sure if there's any way that you guys can quantify that.

Harlan, so you're right. I mean we don't play much in the high volume commodities, whether it's China or anywhere in the globe. But if you look at our China revenue, only about 5% was consumer, and I think that's the part they're going after. Why it's high volume, you don't need a robust or reliable technology in that market. Your cell phone fails, you get a new one. Your robot arm fails, it costs millions of dollars and the line goes down. So we don't play in those higher volume area of the consumer. So I think you're right, China wants to do more indigenous. They will over time. We don't really play what they're going after as much. To say we're completely insulated, would be fabrication. They'll try to do what we do, but they won't ever get to the performance that we get. And Vince always says it good, if you want the best performance chip, you would choose ADI. If you want something else, there's other suppliers, whether it's a China supplier or our competition.

In the -- you mentioned this briefly in talking about the infrastructure, comm infrastructure part of the business. But the team has -- is exposed to the nice trend of artificial intelligence, right? You participate in both compute, memory, memory networking segments of the AI market, right? So for example, you guys mentioned this, your high-speed products go into the ATE or automated testers, that test the complex Nvidia GPUs, the memory, HBM memory stacks. On the flip side, you've got your control solutions, which go into these very sophisticated 800-gig, 1.60 optical modules. And then finally, your power management portfolio, you guys are taking your vertical power delivery to drive these very power-hungry sort of GPUs. So how big is the AI business for Analog? And how fast do you expect this segment to grow sort of going forward?

So the AI exposed part of our business is about $400 million. It's about -- split about 2/3, 1/3. About 2/3 of that is in the instrumentation and test. And that is the -- as you described, that is the high-bandwidth memory testing, which is critical for all of these AI data center builds. That continues to be very strong for us. As a matter of fact, we're going to have a record this year in memory test. On the -- as you talked about on the connectivity and the power, and we've talked about this a little before, we have 2 design wins that are coming online. We have the 1.6 terabyte optical module that's been designed by one of the large high-performance compute companies. That is going to start to generate revenue in the back part of '25. And then we have a vertical power solution in designing at one of the hyperscalers, and that is expected to generate revenues sort of maybe late '25, more likely into '26. The combination of those 2 opportunities is worth about $100 million. So sort of 10% overall to the communications business. So pretty significant for us from a go-forward perspective. And we continue to work across the hyperscalers and the high-performance compute and are gaining traction there. So we are exposed there. And look this is -- and Vince has talked about this a bunch, right, we're still in this first part of the AI world, right? This is the infrastructure build out. The next wave, which will be very powerful for ADI in the long term is when we get the AI out at the edge, right, doing the compute and at the edge where the data is being gathered, right? And that drives a ton of incremental benefits because you get lower latencies, you get lower power consumption, you get better security. And so that's another significant opportunity if you think about where we're headed from a long-term perspective from an AI exposure.

In your -- just rewinding back a little bit. In the comm infrastructure business, strong leadership in signal processing, RF, power management, DSP, really strong exposure to 5G infrastructure, cloud, hyperscale, right? It's clear that the overall infrastructure spending is cyclical, influenced heavily by the macro trends. And this segment has been soft for the Analog team for over 18 months, right? The good news is it looks like it did trough in the first half of this year, down 45% year-over-year. Grew sequentially last quarter. Expected to be relatively flattish this quarter. How do you see the potential profile of recovery in infrastructure kind of looking out over the next few quarters?

So I actually think that we're not seeing a lot of traction in the traditional wireless and wireline. So I do think that the recovery there will be muted, but we will benefit from the pieces I just described on the optical modules and power management as we continue to gain more traction there. Look, I also have a view longer, this -- the increase in speed inside the data centers is going to drive a need for increased speed outside the data center. So I expect we will start to see a new wave of capital spending there. Because if you look at where the infra providers at telcos, we just haven't been spending on it, right? And we've talked about that a lot in the prior quarters.

Yes. Let's talk about the financials in the manufacturing strategy. You did bring this up a couple of times, but the hybrid manufacturing strategy, the flex capacity that it enables, has allowed the team to drive 200, 300 basis points better gross margins at the bottom of this current cycle, right? You have a target to qualify 70% of your products to run both internally in your fabs, externally at your foundry partners by the end of next year. First question is, is the team on track for this? And where does that sort of mix stand today by percentage of products that can run both internal and external?

So -- and we've talked about this, we're starting to see our CapEx come down. We've talked about getting back. And that's because we're getting to the end of the resiliency campaign. Part of this resiliency campaign was qualifying more of our products internal and external. Today, we're still running about 50% internal and external, but we expect by the end of next year, we will have done the qualification for 70%, which gives us a really -- now to be clear, it doesn't mean we can run 70% of the products at any one point in time, it just means it gives us more products and families that we can swing internal and external as we deal with both the increase and decrease in demand, right? Because obviously, if we saw a steeper acceleration in the demand than we've currently got planned, I mean we would fill our factories and then start to look to scale externally. So we feel very good where we are. The other piece of this resiliency campaign, it was really important to us because it was one of the things customers asked for is we've got this partnership we talked about with the SMC to get capacity in their new Japan fab. And so when that fab comes online, we'll have the ability to produce 95% of the product outside of China, including Taiwan. Now clearly, we do not want to move our production outside of Taiwan, but having the ability to do is an important resiliency for our customers. So again, and that's been part of what we've been doing, spending record amounts of capital over the last couple of years.

Portfolio expansion in your target markets has been a driver of the outsized growth rate. Obviously, the team has done a phenomenal job on the organic growth of the portfolio. But you've also got a very, very strong track record of unlocking the synergies within the acquisitions that you've done, Hittite, Linear Tech. Now you're in the midst of unlocking $1 billion of revenue synergies by fiscal 2017 via the Maxim acquisition that you completed in 2021. And we can already see some of this unfolding, right? GMSL, Maxim attached to Analog, A2B connectivity solutions. We can see the synergies within the battery management portfolio. We can also see that within the focus on factory automation, right? Maxim's leadership in PLC, combined with ADI's leadership in signal chain. So where are you in that journey to $1 billion and the confidence level on getting there by fiscal '27? Or does the downturn also kind of push out that revenue synergy extraction to maybe fiscal '28?

So despite what we're seeing in the variability, I think we are still on track for the synergies in '27. I should get you to write my scripts, you did a very nice job of summarizing where we're gaining traction on the synergies. But we are continuing to see design wins across the portfolio. We are seeing a lot of co-development work with our customers related to the synergies. So we feel very good about where we are on track for the '27 synergy goal.

Any questions from the audience? Almost about out of time, but I did want to ask a question on the U.S. and European CHIPS Act bills, where you've got fabs in both U.S. and Europe. We are seeing grant disbursements. So what's the status of grant disbursements and timing of incentive tax credits for the Analog team? And more importantly, have you seen an acceleration in customer engagements that are looking to source more of their semiconductor value from the Analog team going forward, especially as customers look to not only boost their supply chain, right, from a diversification, but also from a resiliency perspective?

Sure. So I'll go back and I'll do the CHIPS Act first piece. So at this point, we've got on our balance sheet about $300 million worth of net tax credits that will start to come in over time. We have not seen significant amounts of cash with our year-end often different taxes. And so we'll start to see some of those come in. We're expecting we'll see about $100 million of that come in fiscal '25. We are also going to receive some grant money. We've already been awarded some grant money in Europe. We are in the middle of finalizing our grant process with the U.S., and we expect we'll have more visibility on that in the next quarter or 2. But year-to-date, it hasn't had a material impact on cash or our P&L. We have some minor amounts flowing through our P&L. But I think year-to-date, it's less then. So this is more forward-looking for us. And clearly, what we continue to see with customers -- and this is both from resiliency, but just from an overall perspective, is customers are coming to us when you need real domain expertise to solve a complex problem. And where we excel is the hardest problems, most complicated solutions and delivering stuff that performs and lasts. You can see in our products, right, our average industrial product lasts for 15 years.

Great. Well, we're just about out of time, Rich and Mike. Thank you for participation and great insights today, and we look forward to monitoring the execution of the team going forward. Thank you very much.

Thanks for having us, Harlan.

Thanks, everybody.

Thank you.