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

Please welcome Rich Puccio, Chief Financial Officer of Analog Devices; interviewed by Harlan Sur at JPMorgan.

All right. Good afternoon, everyone, and welcome to JPMorgan's 2026 U.S. All Stars Conference here in London. Again, my name is Harlan Sur. I'm the semiconductor and semiconductor capital equipment analyst in the U.S. for the firm. Again, very pleased to have Rich Puccio, Executive Vice President and Chief Financial Officer at Analog Devices, here with us today. So for those of you that don't know the Analog Devices team, leader in high-performance mixed signal, RF all semiconductor solutions, strong position in power management, very strong position in signal training processing, which is both analog and digital, which is a technology that bridges the real world to the real world to the physical world, best-in-class gross operating free cash flow margin, a strong capital return program and a very diversified business, industrial, automotive, data center comms infrastructure, greater than 85% of the company's total revenue. So Rich, thank you very much for joining us today.

Thanks for having me, Harlan.

So I think the best place to start off with this sort of where we are in the current up cycle and the resilience in the business, right? So as the industry and a lot of devices emerge from a cyclical downturn in 2023, 2024, your business bottomed in April of you were driving about 34% year-over-year revenue declines, but did start to drive positive sequential good trends, which continued all the way into this year, right? You drove the positive year-over-year inflection in the April quarter of last year. You've driven 7 consecutive quarters of accelerating year-over-year trends, anticipating 41% year-over-year growth this quarter. Take us through the dynamics over the past 12 months since we last had you here. And more importantly, like your view on the idiosyncratic and cyclical dynamics in your business sort of going forward?

A lot of questions. So I guess a little bit of it starts where Holland started. As we started to exit '24, we had started to signal and started to see some sort of what I would call idiosyncratic drivers that we're areas in our business that we're holding up better than others and starting to show growth. And early on, we started talking about our ATE business and our Aerospace and Defense business. And then as we look forward, at that point, we were anticipating that we would start to see growth there. And sequentially, with continued improvement, the broader cycle upside would come into play. And what happened as we progress, 2 things happened. One, we did start to see that cycle improvement. But I would say it was not as early as some of our idiosyncratic pieces. And I'll go back to some of the key signals and things that we were talking about as we evaluate this change. But if you look -- if you just look at where the -- we'll talk about this more as we go, I'm sure, the areas where we're calling it sort of the super cycle part of the business. Aerospace and defense, obviously, you can see everything going on and around the world and the increased demand. And that was very resilient and that was growing. ATE was starting to see significant benefit from the increased infrastructure spend. So this is early sort of the indirect impact of the data center infrastructure build-out. Because of the increase in high bandwidth memory, high-performance compute, you need more complex testers, which meant you needed more ADI content in sites to be able to do the complicated test. So those 2 businesses were really strong. And then as we continue to move forward throughout the year, what we started to see was obviously the acceleration in our data center business that we were seeing as part of that build-out. We'll talk more about that. But that is a business where we've been a very strong player in the tower in the optical side. So that started to grow. And then as the broader cycle marker is starting to show. One of the things we talked about paying to determine where we were in the cycle was when did our broad market industrial come back, right? We are at our core a 50% industrial products company. And for a long time, we weren't seeing any of that mass market high-volume product coming back to historical volume levels. When we started to see that come back. And then what you started to see was the real acceleration in our growth because we had our idiosyncratic drivers, adding the third, which was now data center and also the sickle drivers. And we had a couple of businesses within end markets that were slower to recover. But by the time we get exiting '25 and into '26, we are now in growth across pretty much all of the end markets all of the subparts of the end markets. So a good one, a big chunk of our industrial business that was slower to recover was our automation business. Of course, we started to see automation grow and now for the last almost a year, automation has become a big growth business, and that's a pretty good slug of our industrial. But if you think of essentially 30% of our business is in ATE, aerospace and defense and data center, and those have been growing at very high rates. Then to have the broader recovery, you start to see that come through. The other area for us, which we've talked a bunch about is automotive, right? Despite what has been a relatively soft SAAR units environment in auto we've continued to outgrow units pretty significantly. If you look over the last 5 years, we've outgrown units by about 15%, and that's largely because we've got share and content gains, right? We made investments early in the products that support automated driving systems and the immersive cabin experience. And so those have been really strong growers for us. And so then you start to step back and look at it, we feel very good with the demand signals we're seeing, where we are from a booking and backlog perspective, that we've got an opportunity for sustained growth in the double digits even into '27. Look, there's a lot of uncertainty in the macro environment. So we always have to be cautious about that. But with what we see today, I don't think we've ever been more confident in where we're positioned in the market. and looking out at the opportunity next year.

No, that's great. And to your point, I think last quarter, Q2, the team drove double-digit year-over-year growth in all 4 of your segments, right? Talking about a synchronized sort of recovery across all of your different end markets.

Yes. I said we had -- and an early signal for this is we've been talking about since we continue to see really strong results from a design win perspective. And if you look at the growth in '25 in design wins and '26, that's another good indicator for where we'll head medium term. So -- and -- in addition to our end markets, the other thing that has happened is we've seen growth return in all of our geographies. So it's very broad-based at this point across all of our end markets and across all of our geographies.

Well, maybe more from just a near-term perspective right back last year when we hosted you at this conference, the team had already driven sequential bookings growth in 6 out of the last 7 quarters. That's now out of the past 11 quarters of sequential bookings growth, right? You're about midway through this quarter, January quarter next quarter typically does tend to be seasonally weaker sequentially, but do the current order trends imply a seasonal return to seasonal trends in January? And how are you seeing sort of order activity, current order activity by end market or geography.

So I'll go backwards. I don't do any mid-quarter updates on our bookings, and I also don't guide to Q1. However, you are 100% correct. Typically for us, Q1 is a down market. But what I will say, and I think I might have said this on the my Q&A on the earnings call is with what we see today, I do expect that we can deliver an above seasonal Q1.

Got it.

And normally, Q1 would be down in sort of the mid-single digit just -- so I do think we can do better than that given what we've seen. One of the things we've seen, and I think you're probably talking to other semis you're seeing a little bit of this. We're getting a little bit more visibility than we probably we had 6 months ago. Harlan, where I'd be very confident in what my 1 quarter out visibility looks like. We're starting to get a bit more bookings coming in out into the second quarter, which just has given us a little bit more visibility, which is helpful for us given we're making wafer starts 6 months in advance of when we're actually delivering wafers. So that visibility is helpful for us.

The team has done a good job of shipping below your customer and channel consumption levels over the past 10 to 11 quarters. You exited July with 156 days of inventory on your balance sheet, that's down sequentially. Channel inventories continue to below be below your target of 6 to 7 weeks. How do you anticipate the trend on your inventory this quarter any signs that customers are starting to replenish inventories? Or are they still conservatively ordering to their consumption trends?

So from an overall strategy perspective, we've talked about this going on almost 2 years, we've been consciously adding inventory back on our balance sheet and actually have started to ship into the channel to add inventory. But the competing dynamic is the revenue growth rates and the sell-through activity is accelerating at a faster rate than probably any faster rate than folks anticipated. So despite adding -- I think we'll -- we ended Q3 with record gross inventory levels, we will add more -- expect to add more inventory in Q4, but I still expect days to even likely stay flat. And on the channel, same thing, we talked about in the quarter call that we added inventory into the channel. But the sell-through is accelerating so fast. We're also still keeping below our sort of 67 week target range. Again, we will, as we've planned to add more to it channel. But I fact we'll spend up in and around that slightly below 6 weeks. And in that a little bit is an indicator of how much in-quarter business is being generated given the steep demand seeing across the end markets. So we will continue to try to optimize just given where we are in the cycle in demand. But I don't expect we'll see an increase in days or weeks despite our efforts. That said, I think we're pretty well positioned from a simple perspective -- sorry.

And typically, as we move from the bottom of the cycle to the positive parts of the cycle, the first phase of goodness is customers depleting excess inventories, and then they start ordering your products in line with their consumption trends, which is kind of where I think you guys are now. The next phase of growth is when your customers feel comfortable about their demand signals in keeping higher levels of inventories on their balance sheet, I would call that the replenishment cycle, right? So you're right now at a pace where you're shipping into your customers' consumption trends, but -- are you already starting to see that second phase of growth where customers are starting to replenish inventories? Or is that still in front of the ADI.

I think it's actually a bifurcated story because I don't think we're actually shipping into consumption across our pool customer portfolio. If you look at the 3 super cycle areas I mentioned before, ATE, ADF and data centers. If you look probably where we are today, I would say we've already got to what would have been that historical consumption line and are probably above it. SP130629864 But for the rest of our business, we are still at or double digits below. So in Industrial, for instance, greater than 50% of our industrial subsegments are still double digits below that consumption line. So that's why I say. And when I look at that, and I try to -- I get asked this question all the time, where are we in the sucker. When I look at it, one of the things that's important is for the 3 super cycles where we're clearly above the consumption line this way. that is visible end demand. We see data centers being built. We can see what's going on in aerospace and defense were and ATE, although indirect is directly tied to the amount of testing required for the new hyperscaler build-outs. So those 3, despite being above consumption, I do not believe our inventory building period, but they are trying to get as much as they can to their building today. So I don't think we've even finished getting back to consumption broadly because so much of our business is below that level. And then I would agree, at some point, you'll get the -- and the OEMs and end customers -- their memories will jump back and say, hey, we couldn't ship product because we didn't keep enough into in our books, and we will want to put some safety stuff. We have not really seen any of that behavior. I would say that's not been a primary or even a secondary driver of our growth yet. And you see if we can't keep inventory in our channel, and we're not seeing it on our customers. And we do -- and my team looks at our 250 customers, and we track their inventory levels and their revenue levels get ours and the signals are usually pretty clear when they're starting to put inventory on their balance sheet or deplete it. And we only got to depleting inventory in sort of where we feel like we don't have any other inventory challenges in the last sort of 3 to 4 quarters right. And one of those cycle signals was we saw the broad market come back. As I mentioned, well, I also think part of the dynamic was the broad market may have been the last ones to get some of their late allocations from the prior shortages. So it took them a bit longer to work it off. A year ago, we were talking about automation struggling. We think that inventory has been worked off. And then in the last 1.5 years, we've been seeing a work off of inventory in our BMS piece of our auto business. And we actually think that, that business will come back to growth in the current year. So both from an idiosyncratic ADI. We think we've got a tailwind and also from where we are in the cycle, which, again, is why you heard Vince talk about on our earnings call, a level of confidence that we can continue to grow in double digits into '27.

Yes. So let's take a step back and -- let's actually look mid- to longer term. You talked about the potential, Vince talked about the potential for double-digit growth profile in fiscal '27. But if I look back at the Analog Devices team over the past 20 years, you've grown your revenues at a 10% to 11% CAGR, about 30% faster than the semiconductor industry earnings and free cash flow per share growth at a 12% to 15% CAGR over that period of time. Yes, some of the growth has been inorganic, but majority has been organic, right? I know your prior the team's prior revenue growth target was like the 7% to 10% revenue CAGR of $15 of per share of earnings power in fiscal '27 which, by the way, you guys are going to blow past that if I look at ours and consensus estimates, given the leverage the data center, the idiosyncratic data center, aerospace and defense, we'll talk about energy infrastructure a little bit, continued content gains in automotive, physical AI how does the team think about the forward revenue growth and earnings power profile of the company, not just fiscal '27, but how should we think about that over the next few years?

Certainly, we have had pretty significant growth well above our model for the last several years. And we expect that in this upcoming year, we'll have double-digit growth again. Now if you go back and look at our business back to, say, 2018, '19, we are -- have essentially run at a CAGR about that 10.5%. So -- and that has outperformed. Do we think with what we see from bookings, backlog, design wins that we continue -- can continue to outgrow the market? I do. The other thing that's important in there, and you talked about the leverage is -- we have been super disciplined from an execution perspective. We talked about coming out of the downturn that we would be very judicious in how we deploy capital. We've made those decisions in a smart way. Obviously, first call for us has been in R&D. It will continue to be R&D and which are the most important high-leverage projects, and we've been very disciplined adding expense elsewhere. So you've seen that in the EPS and cash flow numbers coming. And I think the resiliency of our model will continue. So I think we're very well positioned. Again, I worry a little bit just because the macro continues to be uncertain. We are under a ton of cost pressure and inflation pressure. And I do think one of the things that has helped us has been disciplined execution. Obviously, we've maintained -- we were maintaining price better than most of our peers. And in fact, they've had 2 price increases. And then the third thing that's really important, and I'd love to highlight this because we did a very large acquisition a few years ago and promised the world that we would achieve $1 billion of synergies by 2027. And -- while I'm happy to say I expect we will exceed the $1 billion, and I think we will close out '26 with near $700 million worth of synergies. So those things give us confidence that we can continue to be a double-digit grower.

When we look at our companies and we think about the growth profile, the potential growth profile, right, the 1 thing that we always look at is your design win pipeline, right? It's a strong -- I think it's a strong forward indicator of the revenue growth potential. The analog devices team, you guys grew your design win pipeline by double-digit percentage in fiscal '23 -- fiscal '24 across all end markets, right? 20% growth in your design win pipeline last year, fiscal '25. How is fiscal '26 tracking so far? And what areas of your portfolio or end market exposure, are you seeing the strongest expansion and design win momentum?

So I agree with your sentiment. The best way to think about where we're headed in the next 3 to 5 years is what design win looks like. And we're on track in 2016 to exceed the growth rates we saw in design wins in '25. I would say, as you'd expect, we're seeing outsized growth numbers in data center and aerospace and defense. But I would also say, broadly across our portfolio, design wins will be up over the levels we saw in '25. So we feel really good about what we're doing from an engineering perspective and how we're deploying our capital given what we're seeing from a design perspective.

Let's talk about some of your end markets, and I'm going to start off with your largest end market, which is industrial. It's about 50% of your total revenues. I love industrial because it's just a diverse set of different businesses, factory automation, health care, automated tests, instrumentation and test, energy infrastructure, aerospace and defense, right? And as you've pointed out several times, one of the strong dynamics among several, which separates ADI from its peers is your strong exposure to aerospace and defense strong mixed signal, RF, millimeter wave, DSP, compound semiconductor products, right? This is a growth area for during the last downturn continues to drive a strong growth profile. Last year, this business when we were at this conference, I think it was just about breaking through $1 billion sort of annualized revenue run rate where is AMD currently trending on an annualized run rate basis? And what types of programs is the team leveraged to? Is it SATCOM? Is it radar, missile systems, et cetera? Like what's -- and then what's the growth outlook look like over the next sort of few years.

So as you said a year ago, we were talking about that business, it's getting to $1 billion. If we look at the Q3 exit rate for that business, it's nearing $2 billion. So obviously, a substantial amount of growth. And the important thing to think about is a couple of things. One is our Aerospace and Defense business, that includes what we're doing both from a government contracts as well as our commercial self products. where we're engaged in satellites, both whether it's the LEO satellites or the geosynchronous satellites, it's in drones, it's in missile defense systems. So it is a pretty broad portfolio and that obviously leverages a lot of the technologies that we've built and technologies we've acquired that you mentioned, I don't need to relist them. And we feel very strongly that, that business can continue to grow double digits for the next decade. And when we look at the external signals, the U.S. is asking for a 50% increase in their defense spending. The Europeans are going to spend some percentage of their GDP. So I think the opportunity is real, and we're very well positioned across our portfolio in aerospace and defense.

And then within industrial, the other sort of idiosyncratic driver has been automated test equipment, what you call ATE, right, another strong segment. As you mentioned, right, you're benefiting from the demand of these automated test equipment systems that test, NVIDIA GPUs, Broadcom XPUs, Intel, AMD CPUs, our components go into automated test equipment that test these new high-speed memory architectures, right, like high bandwidth memory DRAM that supports, let's say, an NVIDIA-based or AMD-based GPUs, right? Here, the team leads with its leadership position in high-speed data converters and high-speed precision amplifiers. It's trending up strongly year-over-year. Like what's the annualized revenue run rate of this franchise right now?

So exiting Q3, our ATE businesses annualized run rate was just about $1 billion. As we've talked about in the past, we have incredibly strong share position in ATE. And one of the outcomes of this increase in high-bandwidth memory and high-performance compute as the complexity of the testers increases. So each generation of more complex testers tend to drive more ADI content. So a little bit similar to the auto story where in addition to getting share, we're also getting increased content as the complexity of the test has increased. So I think that, that's an area -- another area given what we see in the forecast from infrastructure AI data infrastructure build that is another business we think that has tailwinds, right, and gives us an opportunity for that above-market growth.

And then sticking with Industrial, and again, the diversity of the business that I talked about before, in emerging end market segment within Industrial is your Energy Infrastructure and Energy Systems business. And again, this has tiebacks to data center and all of this AI build-out, right? The team has, I think, sized the energy infrastructure/systems market is on a $500 million sort of annualized run rate for this year energy storage systems management and monitoring, right, extremely important for data center infrastructure. You leverage here your expertise in battery management solutions, like what are the building blocks in the portfolio do you leverage to target this fast emerging segments within Industrial?

Yes. So obviously, it is a really important sector, the energy management. because back to the infrastructure, everything seems to circle back to the infrastructure. The power constraints are going to continue to be 1 of the challenges for that world. So the ability to manage energy, including energy storage systems is going to be critical to the ability to get renewables on to the grid to manage that distribution. So our ability to work with the energy business is critical. BMS, obviously, our reputation is we have the best BMS systems in the world, so not just in cars, but it or building batteries for that structure. But then if you look at our broader signal chain, one of the things that the energy companies want to need from us is our ability to sense how power is being used, what's happening in the infrastructure and give them telemetry and data so that they can enhance the efficiency of their operations. So that is the broad part of our sensing and single chain, where we're leveraging our core franchise products in conjunction with our intelligence and algorithms to be able to provide the energy to be able to help the energy providers manage and deliver power efficiently because one of -- there are finite places to build in more energy. So the holy grail is getting more efficient in how we use the power that is available. So which is why we feel really good about where we're positioned there. It also gives us a lot of insight into in the power from -- essentially, you heard Vince talk about this on the call going from power coming out of the grids all the way to the power going the GPU/exTU. And that's really helpful for us when we're working with the large data center customers.

Yes. And that's a good segue into my next focus area, which would be your core, what I call your core data center and accelerating compute segment, right? You've articulated your data center exposure, power delivery, power management products, optical networking control products at around 80% of your total comms infrastructure business. This data center portion of it is up 100% year-over-year -- it's about a $2 billion annualized run rate with 50% power, 50% optical. On power, obviously, a strong position in power delivery, like help us understand the breadth of the team's portfolio here, right? You talked about -- you and Vince have talked about grid power delivery from grid to chip, right? Help us understand the diversity of products and solutions that you attack this particular segment of the market with.