Analog Devices Inc (ADI) — Q4 2025 Earnings Call Transcript

Thank you, Gigi, and good morning, everybody. Thanks for joining our fourth quarter fiscal 2025 conference call. Joining me on the call today is ADI's CEO and Chair, Vincent Roche; and ADI's Chief Financial Officer, Richard Puccio. For anyone who missed the release, you can find it and related 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, 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 and nonoperating expenses, operating margin, tax rate, earnings per share 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-GAAP 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 earnings per share are on a fully diluted basis. And with that, I'll turn the call over to ADI's CEO and Chair, Vincent Roche.

Thanks, Jeff, and good morning, everyone. So our fourth quarter results reflect the ongoing business recovery with continued growth in revenue and earnings per share, both of which finished above the midpoint of our outlook. Now widening the aperture to our fiscal '25. Revenue accelerated throughout the year and returned to meaningful growth despite the persistent macro and geopolitical headwinds. All of our end markets increased by double digits, reflecting both cyclical and company-specific drivers, including strong execution against our Maxim revenue synergy targets. Top line strength, combined with margin expansion, resulted in earnings per share growth of more than 20% in fiscal '25. Our strong operating results and reduced CapEx enabled us to generate record free cash flow of more than $4 billion or 39% of revenue. We also returned more than $4 billion to our shareholders, supporting an 8% dividend increase as well as share count reduction. Innovation has always been integral to ADI's brand and our value proposition, forming the foundation for strong financial performance. Consequently, R&D activities received capital prioritization with record investments made in FY '25 to advance our leadership in analog, mixed signal and power technologies. We've also intensified our focus on software, digital and artificial intelligence capabilities to strengthen our core franchise, enabling us to address increased customer complexity and expedite their innovation cycles and time to market. Our comprehensive technology portfolio, combined with extensive application domain expertise uniquely positions us to proactively identify and resolve the most complex engineering challenges for our customers. As a result, we're realizing stronger value capture as reflected in the increase in our average selling prices, particularly in new products, where ASPs significantly exceed those of legacy offerings. Beyond product innovation, our dedication to customer success encompasses ongoing investments to streamline and accelerate their product development activities. To this end, we are rapidly expanding our development support environment from research to deployment with a combination of proprietary ADI tools and leading ecosystem and open-source platforms. Furthermore, following the acquisition of Maxim, we've allocated over $3 billion in capital expenditures to substantially enhance capacity, optionality and resiliency for our customers, supporting our long-term vision for sustained growth. Now as you've seen, our relentless focus on driving customer success translates to strong results and a diverse design pipeline that grew more than 20% in fiscal '25. So I'd like to share a few examples of our success this past year. Within industrial, every sector grew, driven by improved cyclical dynamics and powerful secular trends such as AI, automation, and the drive for efficient and reliable energy generation, transmission and distribution. For example, the exponential growth in demand for AI and high-performance compute drove a record year in our automatic test equipment business, building upon and extending our strong position in the SoC and memory test markets. We anticipate further growth in FY '26 due to our expanding design pipeline and industry transitions to HBM4 and expected double-digit growth in hyperscaler CapEx. In '25, robust automation design and growth was propelled by the burgeoning demand for enhanced productivity, efficiency and reliability across key sectors such as manufacturing, logistics and health care. This momentum was particularly evident within our Robotics segment, which saw notable expansion as customers increasingly prioritized automation to streamline operations and improve business outcomes. As highlighted in our previous quarter, we foresee tremendous long-term opportunity as advancements in AI fuel the emergence of content-rich humanoid robots positioning ADI at the forefront of the next wave of robotics innovation. Within health care, the proliferation of robot-assisted surgical systems represents a vibrant vector of growth alongside our Imaging and Diagnostics segments. Additionally, we expect growing demand for our suite of diabetes management solutions to continue to contribute to growth in FY '26. Energy was our fastest-growing industrial segment this past year, driven by high demand from the industrial, transportation and data center sectors. Design and activity were especially strong for grid management and battery storage systems, and we anticipate continued growth in '26 and well beyond. Aerospace and Defense achieved record results, and we expect further growth in the year ahead, driven by our expanding portfolio of advanced sensor, mixed signal and power solutions, coupled with an increasingly strong opportunity pipeline. We also expect to maintain our strong presence in the growing low earth orbit satellite market. Turning to automotive. Advances in autonomous driving and cabin digitalization led to a record year for ADI in fiscal '25 with growth outpacing light vehicle production. Our intelligent audio and video connectivity solutions, which avoid bulky and expensive cabling, drove multiple new growth awards across GMSL, A2B and our signal processing and safe power portfolios. Building on this success, our new E2B Ethernet bus is expanding our market, simplifying customer systems, boosting power efficiency and lowering costs as it gains traction. In the communications sector, AI CapEx investment led to a record year for our data center segment with design and activity more than doubling. Strong demand for high-throughput connectivity and power delivery solutions support our confidence in continued growth through '26. Wireless communications is one of the few areas of softness in '25, but we believe customers have completed their inventory digestion phase and that the market bottomed during the year. In addition, we see a positive impact of new products such as our software-defined AI-enabled macro base station on a chip solution for which we secured design wins from leading OEMs and service providers and see additional opportunity beyond telecommunications in private industrial networks as well as other secure communications applications. And finally, as consumer markets rapidly evolve, we're expanding our SAM and growing a diverse pipeline by delivering integrated solutions in hearables, wearables, gaming, AR, VR and many related areas. For example, our new Acoustics platform combines analog, power, digital software and machine learning for advanced environmental awareness and adaptive noise cancellation. We've secured design wins for these solutions in consumer and health care segments, enabling ADI to triple the value generated over legacy designs. We've also captured several new power management design wins in premium handsets and smart glasses in FY '25, positioning us for further growth in '26. So in summary, our diversified business model has proven agile and consistently capable of generating superior outcomes reflected in both last year's resilient margins and this year's strong rebound in profitable growth. While we're mindful of the macro environment and the continued impacts of tariffs and trade uncertainty, we remain confident in our growth in FY '26 and beyond as we continue to leverage our key differentiators, namely, an enviable technology leadership position at the intelligent edge as it becomes a center of gravity for a host of secular growth markets, unrivaled application domain expertise and the trusted brand that we have developed and strengthened with our customers over the decades. And so with that, I'll pass it over to Rich.

Thank you, Vince, and let me add my welcome to our fourth quarter earnings call. I'll start with a brief overview of our full fiscal '25 financial performance. Revenue for the year came in at just over $11 billion, up 17% from fiscal '24, with double-digit growth across all end markets. Gross margin finished at 69.3%, up 140 basis points driven by higher utilizations. Operating margin finished up 100 basis points at 41.9% and includes the headwind associated with the normalization of variable compensation. All total, earnings per share of $7.79 increased 22% versus fiscal 2024. Now on to our fourth quarter results. Revenue in the fourth quarter came in toward the higher end of our outlook at $3.08 billion, growing 7% sequentially and 26% year-over-year. Industrial represented 46% of our fourth quarter revenue, finishing up 12% sequentially and 34% year-over-year. The stronger than seasonal results underpins the cyclical momentum we see across industrial as well as the secular growth unfolding in AI infrastructure, which drove a record quarter for our ATE business. For the full year, Industrial increased 15% with growth across every major application, including record years for aerospace and defense and ATE. Automotive represented 28% of quarterly revenue, finishing up 1% sequentially and up 19% year-over-year. Double-digit year-over-year growth continues to be driven by our leading connectivity and functionally safe power solutions. For the full year, automotive increased 16% to an all-time high, driven predominantly by our higher content and share position across Level 2+ ADAS systems globally. Communications represented 13% of quarterly revenue, finishing up 4% sequentially and 37% year-over-year. Our data center segment surpassed the $1 billion run rate this quarter and on a year-over-year basis has now grown more than 50% for 3 consecutive quarters, fueled by continued strength in the AI infrastructure market. Wireless revenue was up double digits year-over-year for the second straight quarter, owing to improving cyclical dynamics. For the full year, communications was our fastest-growing market, increasing 26%, driven by our data center segment, which had a record year, while wireless revenue was flat. Lastly, consumer represented 13% of quarterly revenue, finishing up 7%, both sequentially and year-over-year. For the full year, consumer increased 19%, driven by strong growth in handsets, gaming and a record year for our hearables and wearables segment. Now on to the rest of the P&L. Fourth quarter gross margin was 69.8%, up 60 basis points sequentially and 190 basis points year-over-year, driven by higher utilization and favorable mix. OpEx in the quarter was $809 million, resulting in an operating margin of 43.5%, up 130 basis points sequentially and up 240 basis points year-over-year. Non-operating expenses finished at $60 million, and the tax rate for the quarter was 12.7%. All told, EPS was $2.26, up 10% sequentially and 35% year-over-year. Now I'd like to highlight a few items from our balance sheet and cash flow statements. Cash and short-term investments finished the quarter at $3.7 billion, and our net leverage ratio decreased to 0.9. As I discussed previously, we continue to build die bank buffers for our fastest-growing applications. As such, our inventories were higher by $59 million sequentially while days of inventory declined by 1 to 159. Channel inventory increased but remains lean at approximately 6 weeks. Fiscal '25 operating cash flow and CapEx were $4.8 billion and $0.5 billion, respectively, resulting in record free cash flow of $4.3 billion or 39% of revenue, up from 33% in 2024. In total, we returned $4.1 billion to shareholders through dividends and share repurchases. As a reminder, we target 100% free cash flow return over the long term, using 40% to 60% for our dividend and the remainder for share count reduction. Now moving on to our first quarter of 2026 outlook. Revenue is expected to be $3.1 billion, plus or minus $100 million. Operating margin at the midpoint is expected to be 43.5%, plus or minus 100 basis points. Our tax rate is expected to be 12% to 14%. And based on these inputs, adjusted EPS is expected to be $2.29, plus or minus $0.10. In closing, fiscal 2025 was a strong year, highlighted by a return to growth, margin expansion, and record free cash flow. Importantly, I'm confident in our ability to continue navigating macro and geopolitical challenges and believe we are well positioned to drive further profitable growth in 2026. With that, I'll give it back to Jeff for Q&A.

Thank you, Rich. Now let's move on to our Q&A session. Can we have our first question, please?

I wanted to ask about the near and medium term outlook. In the near term, it seems you're guiding Q1 slightly higher, which is a bit above seasonal expectations. Can you provide some insights by segment regarding where you're seeing strength? I'm curious because it seems industrial was slightly below your expectations in Q4. So any details as we head into Q1 would be helpful. Also, if we look at the guidance for Q1, it indicates a strong annualized sales growth of around 12% to 13% for fiscal '26. I'm interested in your thoughts as you begin the new fiscal year on the broader macro environment and whether this kind of growth rate is feasible in fiscal '26.

Sure. Thanks, Vivek. Rich?

Vivek, I'll take the first part of your question. So Q1, which is our weakest sequential quarter with normal seasonality typically down mid-single digits. And our outlook is up slightly quarter-over-quarter, reflects our seventh straight quarter of above seasonal growth. And another key point is additionally, our outlook assumes sell-in and sell-through are equal. So from an end market color perspective, industrial, we expect to be up mid-single digits above seasonal. We expect auto to be down mid-single digits below seasonal, where we continue to see some risk there around tariff and some of the macro environment. Comms, we expect to be up 10% above seasonal. Again, as Vince mentioned, we're seeing real strength in the AI infrastructure and demand for our data center products. And then consumer seasonally down low double digits. And then all markets, we expect to be up year-over-year.

Yes. Looking year-over-year, we believe we are well positioned for broad-based growth in 2026, supported by both cyclical and unique factors. I expect that industrial and communications will drive this growth. The cyclical dynamics in these sectors are favorable, with inventories decreasing. Both markets have already hit their low points several quarters back. Data centers are also anticipated to experience a significant increase in capital expenditures, where we have substantial exposure, accounting for two-thirds of our communications business. In aerospace and defense, along with ATE, which make up about one-third of the industrial market, we see strong opportunities for growth. The surge in AI demand within the ATE sector positions us well. In the consumer market, we previously discussed the increased content in key applications, which gives us a level of diversity in our business that we have not seen before. As for the auto sector, it has remained stable for a while, and we expect this to continue into 2026. Despite a macroeconomic environment that is uncertain, we project that all end markets will see growth.

Great. Speaking of autos, I think you guys had indicated when you guided the quarter that you'd be slightly down, you ended up slightly up. Can you talk about what's coming in a little bit better? And you guys have been pretty good about helping us understand pull-forwards and things like that. Any sign of any activity now?

Sure, Joe. I'll take that one. Auto has been our strongest market, showing a double-digit compound annual growth rate through the cycle, driven by consistent gains in content and our increased market share, particularly in connectivity and power for advanced driver assistance systems and next-gen infotainment systems. Notably, we've gained significant market share in China, which has contributed to the increase in light vehicle sales. Recently, the market has proven to be more resilient than we and many others had anticipated, as seen by the stronger vehicle volumes. We believe some of the increase in volumes for our business this year was related to tariffs and policies. In previous calls, we expressed that there might have been some pull-ins, and while I cannot provide precise certainty, we made that assessment. Consequently, we approached the fourth quarter with caution, expecting to see some of this pre-buying activity unwind. However, that did not occur. Our results were relatively seasonal, and bookings were normal, with a book-to-bill ratio just below 1, which is typical for the fourth quarter. We are remaining cautious about the market as it is uncertain how the tariffs and recent volatility will affect us and our customers. Additionally, due to short lead time orders, visibility remains low. Looking ahead to our first quarter outlook, we expect it to be a sub-seasonal quarter, down mid-single digits sequentially, but up year-over-year. Given the content gains in this market and the positive design wins mentioned, we believe fiscal year 2026 can be another strong year.

Very helpful.

I wanted to ask about gross margins. You mentioned being at 70% gross margins around $3 billion. I noticed that in the quarter, you came in slightly below 70%. From what I understand, the guidance suggests that gross margins will remain relatively flat around that 70% range. Can you confirm that? I'm curious why we aren't seeing more leverage on the gross margin line, especially since utilizations are increasing. Why shouldn't we expect to see more leverage on gross margins?

Certainly, I will respond to that. We have strong gross margins due to the benefits we gain from our innovation. These margins have improved both quarter-over-quarter and year-over-year, supported by higher utilization and a favorable mix. However, we did not achieve the anticipated 70% because the mix was not as robust as we had hoped. The results in the automotive sector were particularly strong, which affected the industrial mix and prevented us from reaching our target. Looking ahead to Q1, we generally experience lower gross margins seasonally due to annual factory shutdowns for maintenance and customer shutdowns during the holidays. Nevertheless, we expect that the higher industrial mix in Q1 will help balance out these seasonal effects and maintain stable gross margins. It's important to note that we are currently seeing a flat gross margin, which is being offset by a stronger mix, alleviating some of the pressure from the shutdowns. Additionally, as we continue to grow at this revenue level, I want to emphasize that we have made significant capacity expansions in recent years to enhance our resilience. This means we will need to see higher revenue to push our margins beyond the 70% mark. As we mentioned before, the shift in our mix is ongoing, and given the projected strength in the industrial sector leading into 2026, we anticipate that this part of our business will continue to grow.

Yes. I think just one other piece of color, Stacy. The pricing is in good shape. So it's really a question of mix and continuing to push the utilizations.

Thank you, Stacy. We move onto our next question, please.

I would like to follow up on Stacy's question. Have the gross margin levels changed at all across the different end markets? Specifically, have any of them increased or decreased compared to the corporate average? In particular, have the auto gross margins deteriorated relative to the corporate average over the past couple of years or has anything else shifted?

Chris, I would say that the way it was characterized the individual end market margins versus average has not changed, not in any meaningful way.

Vincent, you talked about Maxim revenue synergies. Can you update us on that? I know you said you're on track, but maybe you can give us a sense of where that stands. And then Rich, can you tell us sort of what your sense of like a normal fiscal Q2? It seems like normal seasonal in fiscal Q2 is up like mid-singles. Is that sort of how you think about a typical fiscal Q2? And then maybe like what are the puts and takes as you kind of head into fiscal Q2?

Yes. Tim, I'll begin with the synergies. We started the conversion process of the pipeline in 2024, and it significantly contributed tens of millions of dollars to ADI's revenue that year. The momentum has clearly accelerated in 2025, and we are now anticipating hundreds of millions towards our $1 billion goal by 2027. We expect an even greater contribution in 2026 due to the strong momentum from new products and cross-selling efforts. As we mentioned when we acquired Maxim, there were substantial complementarities in certain technology areas that Maxim supported, especially regarding power and connectivity structures used in automobiles and now in industrial products. This complementarity benefits ADI across a wide range of applications, particularly in consumer, healthcare, and data center sectors. I believe we are on course to fulfill our commitment, possibly even ahead of our initial timeline. Rich, would you like to share your thoughts?

Yes. Tim, you're absolutely right. Our Q2 tends to be our seasonally strongest quarter where we tend to be up mid-single digits. I think that's the right way to think about it.

Thank you, Tim. We move onto our next question, please.

Vince, in your prepared remarks, you talked about ADO drivers led by AI in the data center. And I was hoping you could perhaps speak a bit more to a framework that we should be thinking about across both industrial and comms. Obviously, you dominate semi test analog. You've got some real design wins on the optical and power side. And then you also spoke about energy strength. So is there kind of a percentage of mix that we should be thinking about that should be growing significantly faster than the rest of your business? And if there's kind of numbers around that, that would be very helpful.

Yes. I'll provide some context and then Richard can share specific figures. Specifically regarding AI, we have both the data center and ATE businesses. In 2025, the data center segment saw a growth of about 50%, while the ATE business, which benefits from rising compute demands and new memory types, grew 40% last year. We expect this growth to continue in 2026. Currently, as Rich mentioned earlier, the data center is operating at a run rate of approximately $1 billion. This sector includes two main areas: the electro-optical interface, where we are experiencing strong demand for 800 gig and are now moving towards 1.6 terabit interfaces that require advanced power management systems, and general power areas where we're seeing a shift towards high-voltage technologies that need effective monitoring and control. In power conversion and delivery, our portfolios are gaining significant traction. Regarding delivery, our vertical power technology is being widely adopted, and we are poised for exponential growth in that area. The ATE business has an $800 million run rate and is well positioned with key players in chip testing. As we transition to HBM4, we will encounter increased pin counts, complexity, and higher speed which will enhance the compute density in our chips. We are optimistic about customer engagement and technology in these sectors, forecasting double-digit growth in both over the next few years. Rich, would you like to add anything?

I agree with your perspective on the outlook for the next few years in these areas. When examining external factors, especially regarding data centers and high-performance computing, forecasts from the major hyperscalers and significant buyers continue to rise. Recently, several large hyperscalers have increased their capital expenditure plans even further. I believe that spending in the near to medium term will persist, and we are well-positioned to benefit significantly from our strengths in this area.

Thank you, C.J. We move onto our next caller, please.

One of the other strong dynamics among several, which separates ADI from peers is obviously the strong exposure to aerospace and defense. This has been a growth area for ADI during this last downturn. I think the business is now driving well over $1 billion of annualized run rate revenues or roughly greater than 10% of your total revenues. It grew strongly double digits in fiscal '25. Does the team anticipate continued strong double-digit growth in fiscal '26? And maybe help us understand like what are some of the ADI-specific product cycles here that's going to continue to drive the strong growth profile going forward?

Thanks for the question. The journey for ADI in the aerospace and defense market really began in earnest when we acquired Hittite, bringing in a high-quality RF and microwave portfolio crucial for communications across various defense systems and satellite communications. Our main offerings consist of microwave and RF sensors, along with high-performance conversion products focused on precision and high-speed signal processing. Additionally, acquiring LTC and Maxim allowed us to integrate signal processing technologies and power management solutions. With the global situation not becoming any more peaceful, we anticipate increased investment in defense systems worldwide, especially with strong demand in Europe and other regions. We collaborate with major OEMs, and with rising average selling prices, some of our products can cost tens of thousands of dollars each. Therefore, I believe this business has the potential to more than double by the end of the decade.

Thank you, Harlan. We move onto our next question.

Congrats on the strong results. I wanted to follow up on the comments about fiscal 2Q being a seasonal plus mid-single-digit percent. Could you maybe speak to what's driving the confidence in the visibility there? Any metrics you're able to give on lead times? And then bigger picture, how is your visibility looking forward changed as the mix has changed? Like do you think compared to a couple of years ago, there's more of your exposure tied to ADO drivers like aerospace and defense and data center, and that's increasing your visibility? I'd just be curious to hear because you mentioned there was some uncertainty on the shape of the year in the press release, I'd be curious to hear how you're feeling about visibility.

Thanks, Josh. I didn't provide guidance for Q2, but I can confirm the historical seasonality. As we've discussed, we still lack significant visibility beyond the current quarter plus one. Most of our products have lead times under 13 weeks, resulting in many orders during the quarter with short lead times, which limits our visibility. Regarding your first question, I don't think we've seen much improvement in visibility over the last two years. However, I do agree that we've observed broad strength in several ADO areas that Vince mentioned. Given our current inventory position and cycle times, we still aren't getting much visibility outside of the quarter.

Thank you, Josh. And we'll move to our last question, please.

Yes. So Vince, ADI has been always very thoughtful about allocating R&D dollars and the economy is changing in the front of eyes structurally quite significantly here. So how are you thinking about prioritizing your R&D spend right now? And are there any areas you would like to double down in and perhaps areas you would like to deemphasize as a company?

Thank you, Tore. When I consider the core analog business, we are continuously advancing in signal processing, data conversion systems, and precision, as well as achieving very high speeds. Power management remains a significant growth opportunity for ADI, and we are committed to focusing on it in our strategic planning. Additionally, we see strong potential in our digital portfolio, particularly in areas like low power and low latency, alongside heterogeneous compute structures and algorithmic technologies. I previously noted how we are improving the capabilities of our core analog technologies through the application of machine learning, such as in base stations and consumer applications. Overall, we are focused on ensuring we have the platforms needed to compete globally across various markets and effectively address important challenges. Our customers increasingly expect us to help manage their complexities and accelerate their innovation cycles. Thus, we view our investment portfolio as rich in opportunities, and we face the challenge of selecting the most valuable ones within that range.

Thank you, Tore. Thanks, Tore, and thanks, everyone, for joining us this morning. A copy of this transcript will be available on our website, and all available reconciliations and additional information can also be found in the Quarterly Results section of our Investor Relations website. Thank you for your continued interest in Analog Devices and Happy Thanksgiving.