Analog Devices : ADI USQ Transcript 2025 05 22

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ADI.OQ - Q2 2025 Analog Devices Inc Earnings Call

EVENT DATE/TIME: MAY 22, 2025 / 2:00PM GMT

OVERVIEW:

Company Summary

CORPORATE PARTICIPANTS Richard Puccio Analog Devices Inc - Chief Financial Officer, Executive Vice President Michael Lucarelli Analog Devices Inc - Director of Investor Relations Jeff Ambrosi Analog Devices Inc - Senior Director, Investor Relations Vincent Roche Analog Devices Inc - Chairman of the Board, President, Chief Executive Officer CONFERENCE CALL PARTICIPANTS Joseph Moore Morgan Stanley - Analyst Vivek Arya Bank of America Securities - Analyst Harlan Sur JP Morgan - Analyst Christopher Daley JPMorgan Chase & Co. - Analyst Stacy Rasgon Bernstein Research - Analyst Joshua Buchalter TD Cowen - Analyst Blayne Curtis Jefferies - Analyst PRESENTATION Operator

‌Good morning and welcome to the Analog Devices' second quarter fiscal year 2025 earnings conference call, which is being audio webcast via telephone and over the web. I'd like to introduce Rich Puccio, Chief Financial Officer of Analog Devices.

Richard Puccio - Analog Devices Inc - Chief Financial Officer, Executive Vice President

Thank you, Josh, and good morning, everyone. Before we start to form a part of our earnings call, I'd like to say a few words about Mike Luccarelli. As many of you may know, this will be Mike's last earnings call, as he will be leaving ADI at the end of May to pursue a new career opportunity. I want to thank Mike for his many contributions over his 10 years at Analog Devices.

‌Mike has been instrumental in my transition into the company, and I will be forever grateful for his advice and guidance as I learned the ropes here. I'll miss Mike's insights, optimism, and relentless work on behalf of our stakeholders. Mike, I wish you the best in your new adventure.

I'll now turn the call over to Mike Lucarelli, Vice President of investor Relations.

Michael Lucarelli - Analog Devices Inc - Director of Investor Relations

Thank you, Rich. Good morning, everyone. I will say I've thoroughly enjoyed my time working in investor relations, that's because of all you on this call for investors, to the sell side, to my colleagues at ADI.

Vince, it's been a great 10 years, Rich, it was short and sweet, but it was good. And then my ADI crew, the Thunder Alley crew, thank you for everything for the past 10 years. It's been awesome.

Jeff, who I hired over six years ago from the sell side has been a great asset to the IR team and ADI overall. You'll be replacing me as Head of Investor Relations. Now Jeff, when I started, the stock is $50, it's now $225, 4x. That means you need to drive this stock to $1,000 and I trust you can do that.

So let me pass it to you, Jeff, to host today's call.

‌Jeff Ambrosi - Analog Devices Inc - Senior Director, Investor Relations

Thank you, Mike. It's been a privilege working for you. You've taught me many things about semis, ADI, and life in general. So I'm sad to see you go, I am excited for the opportunity and I'm looking forward to it.

Now, for anyone who missed our earnings press release, you can find it and relating financial schedules at investor.analog.com. The information we're about to discuss includes forward-looking statements which are subject to certain risks and uncertainties as further described in our earnings release and our periodic reports and other materials filed with the SEC.

Actual results could differ materially from the forward-looking information as these statements reflect our expectations only as of the date of this call. We undertake no obligation to update these statements except as required by law. References to gross margin, operating margin, operating expenses, and non-operating expenses, tax rate, EPS, and free cash flow in our comments today will be on a non-GAAP basis, which excludes special items.

When comparing our results to our historical performance, special items are also excluded from prior periods. Reconciliations of these non-gap measures to their most directly comparable GAAP measures and additional information about our non-GAAP measures are included in today's earnings release. References to EPS are on a fully diluted basis.

‌Okay, and with that, I'll turn the call over to ADI's CEO and Chair, Vincent Roche.

Vincent Roche - Analog Devices Inc - Chairman of the Board, President, Chief Executive Officer

Thanks very much, Jeff, and very good morning to you all. Well, our second quarter results exceeded our expectations both on the top and bottom lines, revenue growth was broad based with double digit year over year growth across all end markets. Against the volatile operating backdrop, our favorable performance and positive outlook underscores the growing demand for our exceptional product portfolio and the resilience and agility of our business model.

While we believe the evolving tariff situation is impacting customers' decision making, the cyclical and ADI specific tailwinds I highlighted last quarter continue. And we're ever more confident that our revenues bottomed in 2024 and that we're returning to growth in fiscal '25.

The secret to our success over these many decades has been sensing business transitions early and adapting quickly to continue focusing our capital, where we can best increase our value to customers and improve our ability to capture that value. We invested substantial CapEx over recent years to enhance and scale our hybrid manufacturing model, which helps our customers navigate increasingly dynamic geopolitical and macroeconomic environments.

They expanded capacity at our existing fabs in the US and Europe, and added commensurate capacity in our backend facilities. Further, we deepened partnerships with trusted foundries around the world, including securing additional 300 millimeter fine pitch technology capacity at TSMC's Japan subsidiary. We've crossed qualified a significant portion of our broad product portfolio to be able to quickly swing production across geographies.

In short, our customers now enjoy greater supply optionality and resilience than ever before. On the [APAC] side, we're investing at record levels to further strengthen and extend our world-class technology stack and continue enhancing our customers' experience and engagement with ADI. These investments allow us to take maximum advantage of the incredible opportunities for profitable growth that we see across our end markets.

ADI plays a game that prizes leaps and innovation that transcends near term macro concerns. We focus on five key mega trends that are persistently driving the future of business the global economy and society, namely; autonomy, proactive healthcare, the energy transition and sustainability, immersive experience, and AI-driven computing and connectivity.

As the essential interface between the physical and digital domains, ADI is a critical enabler of these trends. We continue to define and pioneer the state of the art in high performance analog, mixed signal and power management from sensor to cloud, microwave to bits, and nano watts to kilowatts.

Today, customers are turning to us for more complete solutions. The combination of our extensive franchise with the exquisite creativity and broad-based expertise of our technologists gives us the ability to deliver elegant solutions to customer challenges that others struggle even to address. For example, as healthcare becomes more preventative and preemptive, our ability to accurately and reliably sense, measure, interpret, and connect clinical grade vital signs in ultra low par settings is driving robust content and revenue growth at key customers in the smart wellness wearable space.

Within clinical care settings, our cutting edge imaging and patient monitoring solutions are enabling earlier identification and diagnosis of disease, which can enable more effective treatment and better patient outcomes.

Turning to the autonomy trend, advances in automation within the industrial market, for example, are generating tremendous opportunity for ADI. The progression of robotics from fixed arm to autonomous and mobile to humanoid form factors requires ever greater quantities and integrations of sensing, edge computing, connectivity, and energy management, driving our content from hundreds of dollars in fixed robots today to potentially thousands in autonomous and humanoid robots.

In automotive, higher levels of autonomy are increasing demand for our sensing connectivity and functionally safe power solutions across all vehicle types; combustion engines, hybrids, and full EVs. Each new generation of automated system, be it industrial robots or car, dramatically expands our content and revenue opportunity.

And one final example from the AI-driven computing and connectivity trend, where the world's rapid adoption of AI continues to accelerate the growth of our ATE and data center businesses. Our leadership and success in ATE underscores the quality of our portfolio. As the winners in this market, our determined first and foremost by performance.

Our content protester stretches into the hundreds of thousands of dollars. And looking ahead, we believe our leverage of additional mixed signal and digital capabilities to further reduce test time and power requirements will result in an even more content protester. And with AI investments showing no signs of slowing, testing demand for GPUs, XPUs, and high bandwidth memory continues to increase, giving us confidence in a long runway for growth.

Beyond test, our data center customers are turning to us to solve the vast and complex power and connectivity challenges that come with high performance, always on AI computing. As a result, demand continues to grow for our innovative systems protection, optical control, and power delivery solutions.

These are just a few examples of how our solutions leverage persistent trends that transcend business cycles, drive an average selling price 4 times the industry average, and deliver differentiated results for both our customers and our shareholders.

So in closing, we've successfully anticipated the transitions of the ICT industry and invested ahead of the curve for decades. Today, we're well positioned to deliver the AI-driven intelligent edge solutions that will shape our future success.

You may have seen that we just celebrated our 60th anniversary, a milestone that fewer than 1% of public companies reach. But as thrilling as that accomplishment is, I'm even more excited about our future and the immense opportunity before us.

Now before I hand it over to Rich, I'd like to thank Mike Lucarelli, young Mike, for his distinguished and stellar contributions over the past several years to ADI's success, and I wish him well in his next adventure.

With that, over to you, Rich.

Richard Puccio - Analog Devices Inc - Chief Financial Officer, Executive Vice President

Thank you, Vince. Second quarter revenue of $2.64 billion came in above the high end of our outlook, up 9% sequentially and 22% year over year. Industrial represented 44% of our second quarter revenue, finishing up 8% sequentially and 17% year over year. Our industrial recovery broadened with all subsectors and regions increasing sequentially. On a year-over-year basis, we continue to see strong growth in aerospace and defense and ATE.

Automotive represented 32% of quarterly revenue, finishing up 16% sequentially and 24% year over year. This record result was fueled by continued strong demand of our leading connectivity and functionally safe power solutions, particularly in China. Additionally, we saw sequential growth in Europe and North America.

Communications represented 12% of quarterly revenue, finishing up 5% sequentially and 32% year over year. Wireline and data center, which makes up roughly two thirds of our total communications business, drove our strong growth as AI buildouts continue to increase demand for our power and optical control products. And while wireless revenue declined on a year over year basis, it did grow sequentially.

And lastly, consumer represented 12% of quarterly revenue, finishing flat sequentially and up 30% year over year, our third consecutive quarter of robust growth. This reflects our greater share and stronger content position across a diversified list of applications.

Now on to the P&L. Second quarter gross margin was 69.4% of 60 basis points sequentially driven by higher utilization. OpEx in the quarter was

$744 million, up $57 million sequentially driven entirely by variable compensation, resulting in an operating margin of 41.2%. Non-operating expenses finished at $54 million and the tax rate for the quarter was 11%. All told, EPS was $1.85 up 32% year over year and above the high end of our guided range.

Now I'd like to highlight a few items from our balance sheet and our cash flow statements. Cash and short-term investments finished the quarter at $2.4 billion, and our net leverage ratio decreased to 1. Inventory increased $50 million sequentially as we continue to invest in [Dibank] to support our recovery. Days of inventory decreased to 169 and channel week's ticked lower.

In the near term, we are maintaining our strategy of balancing leaner channel inventories with higher levels of inventory on our balance sheet. Over the trailing 12 months, operating cash flow and CapEx were $3.9 billion and $0.6 billion respectively. We continue to expect fiscal 2025 CapEx to decrease materially from 2024 and be within our long-term model of 4% to 6% of revenue.

[Free] cash flow with the trailing 12 months with $3.3 billion or 34% of revenue. And during that same period, we have returned nearly $2.5 billion to shareholders through dividends and share repurchases. As a reminder, we target a 100% free cash flow return over the long term, using 40% to 60% for our dividend and the remainder for share account reduction. Before moving on to guidance for our fiscal third quarter, let me provide an additional color on recent demand trends given the current backdrop.

Unsurprisingly, buying behavior was a bit choppier than normal as we saw some increased activity around the tariff announcements. This was short-lived and orders have returned to more normalized levels. Overall, Q2 bookings grew sequentially across all markets and all geographies, and a backlog entering Q3 is higher than a quarter ago. These signals support our view that our revenue bottomed in 2024, custom inventories are lean, and we are in a cyclical upturn.

Now moving on to guidance. Third quarter revenue is expected to be $2.75 billion plus or minus $100 million. On a sequential basis at the midpoint, we expect industrial and consumer to lead our growth, communications to be up, and automotives to decline after a very strong quarter. Operating margin is expected to be 41.5% plus or minus 100 basis points. This includes the impact of our annual salary increases. Our tax rate is expected to be 11% to 13%, and based on these inputs, adjusted EPS is expected to be $1.92 plus or minus $0.10.

Now I'll pass it back to Jeff to begin our Q&A session.