Analog Devices Aktie

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, analog semiconductor solutions, strong position in power management, very strong position in signal chain processing, which is both analog and digital, which is the technology that bridges 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 is sort of where we are in the current up cycle and the resilience in the business, right? So as the industry and analog devices emerged from a cyclical downturn in 2023, 2024, your business bottomed in April of '24. We were driving about 34% year-over-year revenue declines, but did start to drive positive sequential growth 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 Harlan started. As we started to exit '24, we had started to signal and start to see some sort of what I would call idiosyncratic drivers that were areas in our business that were 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 progressed, 2 things happened. One, we did start to see that cycle improvement. And -- 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 evaluated this change. But if you look -- if you just look at where the -- so we'll talk about this more as we go, I'm sure, the areas where we're calling sort of the super cycle part of the business. Aerospace and defense, obviously, you can see everything going on 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 the testers 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 power and the optical side. So that started to grow.

And then as the broader cycle markers started to show, one of the things we talked about paying attention to, 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. But 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 cyclical 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 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 and 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. And 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 -- and an early signal for this is we've been talking about since '24, 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 10 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 -- a 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 -- in my Q&A on the earnings call is with what we see today, I do expect that we can deliver an above seasonal Q1. And normally, Q1 would be down in sort of the mid-single digits. 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 are seeing a little bit of this. We're getting a little bit more visibility than we probably would have had 6 months ago, Harlan, where we're very confident in what my 1 quarter out visibility look 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 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 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 6- to 7-week target range. Again, we will, as we've planned, add more inventory in the channel, but I expect we'll still end up in around slightly below 6 weeks. And that a little bit is an indicator of how much in-quarter business is being generated given the steep demand we're seeing across the end market. So we will continue to try to optimize just given where we are in the cycle and demand. But I don't expect that we'll see an increase in days or weeks despite our efforts. That said, I think we're pretty well positioned from a supply perspective.

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 and keeping higher levels of inventories on their balance sheet, we 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?

So I think it's actually a bifurcated story because I don't think we're actually shipping into consumption across our full customer portfolio. If you look at the 3 super cycle areas I mentioned before, ATE, ADAS, and data centers. If you look probably where we are today, I would say we've already gotten to what would have been that historical consumption line and are probably above it.

But for the rest of our business, we are still either 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 cycle. 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. That is visible end demand. We see data centers being built. We can see what's going on in the aerospace and defense world. 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 are in an inventory building period. They are trying to get as much as they can to build what they're 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 inventory 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 it, we can't keep inventory in our channel, and we're not seeing it on our customers.

And we do -- my team looks at our 250 customers, and we track their inventory levels and their revenue levels against 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 and sort of where we feel like we don't have any other inventory challenges in the last sort of 3 to 4 -- 3 quarters, right? And one of those cycle signals was we saw the broad market come back, as I mentioned. But 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 targets were like the 7% to 10% revenue CAGR, $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 to 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 have essentially run at a CAGR about that 10%, 10.5%. So -- and that has outperformed. Do we think with what we see from bookings, backlog, design wins that we 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 through. 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, have 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. Well, 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 one 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. 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 '26 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 win 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 this diverse set of different businesses, factory automation, health care, automated test, 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 was a growth area for ADI during the last downturn, continues to drive a strong growth profile.

Last year, this business when we were at this conference, I think was just about breaking through $1 billion sort of annualized revenue run rate. Where is A&D 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 just 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 government contracts as well as our Commercial Off-The-Shelf products, where we're engaged in satellites, both whether it's LEO satellites or the geosynchronous satellites, it's in drones, it's in missile defense systems.

So it is a pretty broad portfolio, and it 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 all 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. Your components go into automated test equipment that tests 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?

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So exiting Q3, our ATE business' annualized run rate was just about $1 billion. As we've talked about in the past, we have an incredibly strong share position in ATE. And one of the outcomes of this increase in high-bandwidth memory and high-performance compute is 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 testers increase. So I think that, that's an area -- another area given what we see in the forecast from an AI/data center 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, an 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 and emerging segment 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 one 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 onto the grid to manage that distribution. So our ability to work with the energy businesses is critical. BMS, obviously, our reputation is we have the best BMS systems in the world, so not just in cars, but if you're building batteries for that structure.

But then if you look at our broader signal chain, one of the things that the energy companies want and 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 signal 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 -- there are finite places to build and get more energy.

So the holy grail is getting more efficient in how we use the power that is available, which is why we feel really, really good about where we're positioned there. It also gives us a lot of insight 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 to the GPU/XPU. 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 split 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.

So on the power side, if you think about my comment earlier on the energy management. So this is getting power from the power distribution companies into the data center. So we have -- obviously are helping get the power to the wall of the data center. And then as you go into the data center, the 3 ways I think about it is there's the power management piece, right, which is think about our hot swap capabilities and our products that do that.

The other piece of it is power conversion, right, because you've got high voltages coming into the data center that you've got to step down through intermediate and then you got to get to that stage 2, which is sort of delivering the chip, power of the chip. So I think we have historically been strong in the first 2 pieces of that and an area we're very focused on is that last sort of micron, which is the power delivery into the chip.

That's right.

And that's actually where the Empower acquisition we did is really important because that gives us an opportunity to have a product in the IVR that is a vertical power solution, which improves the efficiency and effectiveness and help solve some of the complicated challenges with power delivery that is lateral because that chain from the lateral power into the chip, you have a lot of power loss. You're a little bit better when you build underneath. But that is also very complex because of the dimensions and the science. You've got thermal dynamics and noise and diffusion issues you have to address that the IVR addresses. So we think that's a really important piece for us to be able to play, and it helps sort of close our loop all the way from grid to the chip.

And from a hyperscaler perspective, AI, whichever -- however you want to describe it as AI built, if you can and our analysis would say we can save 15-plus percent power loss. If you start looking at the size and scale as we move to gigawatts worth of additional data centers, that's a lot of power savings. So we think that's a really big opportunity for us. And actually, I think that when you look at the long-term opportunity in the data center, probably for us, the biggest growth opportunity is in that Stage 2 power delivery.

And then the second piece for us in the data center is really what we're doing in the optical space, right? And here, our primary position is in that in the optical control system, right? Controlling the lasers. And we have held a leading position there for years, and we've tended to set the standard. So like the power, which we're seeing increases in voltages as we think about the transition to 800 volts and what that means, we're very well positioned. What's also happening is in the data center, the speed with which data has to move across the data centers and across servers continues to accelerate.

So we've had very strong positions in 400 and 800. We're already shipping into a 1.6 terabyte solution into the market. But we're also -- and I think we may have even talked about this last year, we've been working and our customers are already working on what is the 3.2 speed, right? And so each generation of the increase in speed also gives us opportunities to gain share and to get some more content. So that control -- and then the other piece that is a growing area, and I think Vince talked about this on the call is in the optical control systems.

So I think there's a number of those areas where our core products continue to advance to be able to handle the faster speeds, just like we're handling the higher power consumption. So we feel like we're very well positioned there, again, at a $2 billion run rate business, this is really significant for our growth going forward.

The team has talked about on the last earnings call, $1 billion to $1.5 billion in analog SAM opportunity per gigawatt of data center build-out. How do we think about this sort of split between -- what is the split between optical and power?

I'm not -- I don't know if I have an exact split, but I would say, right now, those 2 businesses for us continue to grow at pretty similar rates, right? We've been talking about continued growth, 100%. I do think just given the nature of the power growth for us, the growth rates in power for us will exceed the growth rates in optical because we are going to have an opportunity to get a power position in vertical power that is significantly better than the power position we have today in lateral power. So over time, I think that shift moves away from the 50-50. But I do think given our strength in both positions, they're both very solid long-term growth opportunities.

And the -- we talked about the energy systems. I don't think you guys actually lump this into your data center, your definition of data center, but there's so much focus on energy, energy systems, the capabilities that are needed that you deliver from your battery management and monitoring systems. And so I would assume this doesn't add to the data center, but it sort of biases more -- the Analog team more again towards that sort of power part of the market opportunity relative to maybe, let's say, optical?

Yes. So -- and it does -- as you said, the energy management rolls up into our -- currently into our externally reported [indiscernible]. However, it is the knowledge that we've gained in having those relationships that helps us fully understand the power tree coming from grid into the chip, which obviously helps our data center team.

And look, that there are a lot of challenges at higher voltages, whether it's thermal and/or otherwise. And I think that's a really strong opportunity for us, which is why I said I think the longer-term growth for us is bigger in the Stage 2 power.

One of the things in my mind that has always sort of differentiated the Analog Devices team is you've always approached things from a systems level approach. And one of the things I feel like the market doesn't appreciate is you actually do have -- we all tend to think about Analog Devices as high-performance mixed signal analog and power, but you have a very strong franchise in digital signal processing. You have a very strong franchise in software and firmware development and systems development, right? So how are -- how is the team leveraging your software, your digital signal processing or DSP capabilities, your systems level integration capabilities to gain even further traction in the data center end market?

Great question. And so I would say what we're trying to do, and I think we're doing a pretty good job is drive a very similar strategy to what we drive in the broader part of our business which is leverage all of those components to be able to deliver system-level solutions because what we find, and we're in conversations directly with the large players here, they come with a really complex problem. They don't want to solve these problems across a bunch of suppliers. They want help in one supplier to bring them an integrated solution that solves their problem.

So our ability to leverage what we've built from a core analog, but also from our digital signal processing and now adding into it software and our own algorithms gives us an ability to provide a broader end-to-end solution into the data center. So I think that strategy is what will help us sell more solutions, and that has proven to be a really successful strategy across the rest of our business. And I think our teams are leaning in real hard there.

And maybe as a part of that, 2 weeks ago, the team announced its acquisition of Alif Semiconductor. That's a company that makes specialized low-power microcontroller, compute-focused chip solutions for AI edge use cases across industrial, consumer end markets. What does the acquisition enable the analog team to do that it couldn't have achieved organically or through partnership? And can you just give us a sense of Alif's annualized revenue run rate and gross profitability profile?

Sure. So for us, Alif, obviously brings to us an AI-native platform of heterogeneous compute. And what that does for us is it gives us a product immediately and a platform to bring out that integrated solutions that we want to have for our customers. One of the things that's really important is having that core product allows us to bring a lot more of our broader analog portfolio into our solutions, gives us a significant upside. And I think this was a technology that probably over time, we could have developed, but where they were, this was a really important time accelerator for us. And what we've learned is being in early in these new product situations gives us a significant advantage from a learning cycle perspective.

But thinking about what does it mean, right? We talked about a lot how we were going to benefit from the infrastructure build as a company. But I think if you go back to right when I started, maybe one of my first earnings calls, Vince talked about the bigger opportunity for ADI was going to be AI at the edge, small language models, decision-making out at the physical edge. This helps enable that. So I try to use examples I can understand.

So you think about robotics is a great example. right? We already have the best capabilities in the world that tracking, measuring and sensing physical data. So you're able to take that data, bring it into -- through the signal chain to a compute, which then can make a decision and drive a local action. And that ability to sense, compute and act out at the edge in this physical intelligence world is a significant next generation of AI because you're going to -- it covers a bunch of things.

One, if you think about what are some of the biggest challenges is power, having to compute with small language models out where the data is collected, lower power consumption. Lower latency, which obviously, if you're dealing with certain kinds of robots, latency is super important. You have the signals all happening inside small spaces, not going back and forth to the cloud. And third, security because you're also not transporting the valuable data you're collecting away. So we think that this gives us a significant step forward in speed to be able to start delivering those kinds of products.

Our teams have been working with the Alif technology and some of our algorithms to see that they're going to be able to do that, and we feel very good. So I think this is an accelerator for us in a place we knew we needed to get to as part of our long-term strategy, and we feel really good about the products they have, and by the way, where they are with customers on their products. From our financial implications, obviously, we haven't closed the deal yet, but we don't expect this to be near-term material from either a revenue or a cost perspective. As we start to look out, this probably is a part of our business that ramps more in the sort of '28 kind of time frame.

I see. Yes. We know the management team from Alif, Syed Ali, who comes from the -- he was the founder of Cavium, a leader in compute and look at their solutions that they -- I was producing the ALI portfolio of products, and it's microcontrollers, it's microprocessors. It's standards arms based, but they have this unique sort of AI acceleration capability built into every one of their MCUs and MPUs. And to your point, it sounds like they have a very strong design win profile across industrial, IoT, consumer, wearables types of applications.

And the other piece of their business that's important also as we look out to this out of the edge is their ability to do sensor fusion.

Yes, that's right. Let's talk about pricing. Pricing has been an important dynamic in the analog sector this year, right? From what we've gathered, I think as you mentioned, the Analog team has rolled out 2 pricing adjustment actions this year. One in February, another this month. Can you just help us better understand the actions taken year-to-date, whether they were applied broadly across the portfolio or concentrated in specific product families or in different end markets?

Sure. Just to level set from a pricing philosophy perspective, and Vince and I have talked about this before, our goal with the pricing, particularly and it includes the last 2 we did is really to offset the sustained inflation we've been experienced, right? We have worked very hard over a number of years to try to absorb as much of that inflation through efficiency to maintain our margins, but it has just persisted too long. So first price increase that we did was largely targeted at our channel.

And again, our price increases are cost recovery. There's no margin stacking. We're not doing this to increase margins. We're just doing this to try to keep our margins stable at the existing levels. This most recent increase, we've continued to see early on, the inflation was in some obvious places, whether it was transportation costs or gold costs. That has continued to broaden. We're seeing inflation in wafer costs. We're seeing inflation in assembly pricing, pretty much across the supply chain, which drove the second price increase. That one was broadly across all customers.

And so we're -- that, as you described, was rolled out in mid-September. And we'll continue to monitor the market. The dynamics look the inflationary pressure is not receding. I know there's been -- at least in the states, there's a rate increase that hopefully will drive some moderation. But we'll continue to watch that. We'll also continue to try to be as efficient as we can to absorb some of that cost. But again, our philosophy going forward will be to recover costs when we need to, to maintain margin.

Yes, because to your point, and we cover guys like GlobalFoundries, our Asia team covers companies like TSMC and UMC and SMIC and it does feel like things are supply-wise, capability-wise aren't getting better as we step into 2027. It looks like a lot of these -- some of your foundry partners are getting set to potentially increase wafer pricing further. And so based on what you said, if input costs, one of which includes wafer pricing continues to increase, there's potentially maybe a likelihood that ADI will have to take some more pricing actions as a result of that potentially.

Yes. We do not have any incremental pricing actions planned. But as I mentioned, our approach will be consistent. We'll monitor and track. And if it looks like it's going to materially have an impact, we would consider an incremental price increase. But obviously, that's not our preferred path. We'd like to see that inflation come down.

As you continue to move through this up cycle, could you just discuss some of the key gross margin levers that will allow the team to maintain your -- now your near record 70% gross margins into next year?

Sure. I mean, actually, one of the interesting things is we have guided to a record -- for Q4, we've guided to a record margin. And what's interesting about that is the last time we had a record margin, we were at 53% industrial business. We're guiding to this record margin at 50%. So one of the areas where there's an opportunity to continue to maintain in the face of some of these pressures or maybe even increase is mix change, right? If we see a further shift to industrial, which tends to be our overall higher-margin business, we could see some upside.

Obviously, the revenue curve will be a big indicator. If we see this continued acceleration on the revenue curve, then we would just see better fixed cost absorption, which could give us some benefit. And then the third piece, as you mentioned, would be any potential future price increase. But obviously, our preference would be to have costs moderate. But those are the things that will help us stay at that level. The mix within mix has some impact, but broadly, it's that shift in broader industrial that gives us the uplift.

Look, we -- I think I talked about this in the last call. I'm not expecting utilizations to be a driver of further upside because we're running the factories pretty hot. In fact, we're adding new capacity every day into the factories, adding equipment to available clean rooms, adding test capabilities and actually getting more capabilities externally just given the continued growth ramp that we're experiencing.

The team had previously targeted best-in-class free cash flow margins, 34% to 40%. You just drove 36% free cash flow margins, trailing 12 months with greater than 100% free cash flow return via dividends and repurchase. Is that still the right sort of range to think about free cash flow generation on a go-forward basis as a percent of revenues in that sort of 34% to 40% range on a go-forward basis?

Short version, yes, 34% to 40% still is the right model. And obviously, if you look across our peer set, we tend to be in the sort of top part of that as well. And look, one of the things I think that's important about our free cash flow model and the result is it's really a reinforcer of the operating model we're running, right? We're continuing to generate significant operating margins, and we're translating that into cash highly effectively and our ability to use that to return cash to shareholders through dividends, which have increased for 20-something-plus years and stock buybacks has been critical for us as we look at the overall.

And look, there'll be some variations. If you saw at the bottom, we were still very strong free cash flow. We had a record free cash flow '25. This year, we've talked about we've had some incremental payments for some capacity. Obviously, we've got some incremental tax payments things, but still feel very good about where we are in that 34% to 40% range. And our goal is to continue to drive to the high end of that.

We're just about out of time, but I wanted to see if there are any questions from the audience. If you have any questions...

Jeff, you don't get to ask questions.

Raise your hands. I did want to ask a question about your mass markets business because you referred to it broad markets, mass market. I tend to view it as sort of your catalog set of products, right? These are products where they can be used in multiple different applications, multiple different end markets, very high performance, and it gets sold to this very long tail of small- to medium-sized customers.

I mean to your point, this is -- these category of customers oftentimes end up being sort of the leading indicator from a sort of cyclical perspective because they typically tend to move first as it relates to pulling back or starting to add more purchasing capabilities. Can you just help us understand roughly the sizing of the mass market, broad market business and the gross profitability profile because my sense is gross profitability from mass market is actually quite rich.

I'm going to give an answer, and then Jeff will correct me if I'm wrong. I think the broad market is probably about 15% of industrial. And I would say, on average, it's above the corporate gross margin average. But I would tell you, just one point before we stop on this, our broad market, many of our large customers also buy through the broad market. I see. Because we don't dictate where people make their purchases from us. So sometimes fulfilling it through the distribution channel for them is a preferred choice, and we're fine with that. So some of our big customers that we have direct agreements also buy through what would show up in the channel business.

I see. And so back to our discussion on the potential gross margin and the potential for maybe gross margins to continue to inch its way higher. Broad markets falls in the under industrial, which is one of those categories, non-AI focused, right, that is probably still sitting below where you were back in the peak of, I don't know, '21 or '22, right? So as that broad markets business comes back, higher gross profitability profile, that is the potential for maybe driving slightly higher...

And it's interesting because I think we talked about if we get through Q4 where we expect, I think there will be 4 quarters of where we've seen broad market growth. So still much shorter than what would be a typical cycle before we'd see a turn, which is another one of those data points we look at to decide where we are relative to the cycle.

That's great. Strong setup for '26, strong setup for '27. I look forward to continuing to monitor the execution of the team. Rich, thank you very much.

Thanks for having me, Harlan. Appreciate it very much.

Thank you.

Good morning, and welcome to the Analog Devices' Third Quarter Fiscal Year 2026 Earnings Conference Call, which is being audio webcast via telephone and over the web.

I'd now like to introduce your host for today's call, Mr. Jeff Ambrosi, Head of Investor Relations. Sir, the floor is yours.

Thank you, Danny, and good morning, everybody. Thank you for joining our Third Quarter Fiscal 2026 Conference Call. Joining me today is ADI's CEO and Chair, Vincent Roche; and ADI's CFO, Richard Puccio.

For anyone who missed the release, you can find it at investor.analog.com, along with related financial schedules. 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 grow 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 will turn the call over to ADI's CEO and Chair, Vincent Roche.

Thank you, Jeff, and a very good morning to you all. Well, as you've seen, third quarter revenue, profitability and margin earnings all exceeded our outlook with growth across all of our end markets, led by data center and industrial propelling us to the first $4 billion quarter in ADI's history. Demand for our solutions continues to grow supported by robust AI and defense spending, cyclical momentum and underlying secular content growth across our diversified end markets.

Through targeted R&D we continue to extend the limits of technology performance and accelerate the pace with which we are delivering more comprehensive solutions to our customers' toughest problems. In tandem, investments in our hybrid manufacturing network have enabled us to increase the agility and responsiveness of our supply chain and consistently capture above seasonal growth for more than 2 years.

Now for the rest of my remarks today, I'll focus on how we're helping customers meet unprecedented and still accelerating demand for AI infrastructure and energy systems. The fact that data center capacity is now measured in gigawatts rather than flops and tops underscores one of the most defining challenges of the AI era. Our availability has become the primary constraint to further AI progress. Solving this challenge requires more than simply adding more energy, however, it demands a group to chip system-level approach that encompasses both improving the availability and delivery of energy and extracting the maximum computing power from every watt delivered.

Now let me walk you through some of the key elements of our grid-to-chip strategy starting at the grid where the AI bottleneck begins. As electricity networks become more complex, visibility, efficiency and resilience are becoming critical challenges. Customers are turning to ADI's grid monitoring solutions to illuminate the flow of energy across the network, providing real-time insights into voltage, current, power quality and system health. And our higher-value solutions are helping utilities, energy operators and infrastructure providers to improve efficiency, reliability and utilization.

An increasingly essential part of the grid and one of the fastest-growing sectors is energy storage. Here, customers choose ADI's industry-leading battery management technology to help maximize usable energy, improve system efficiency, extend battery life, enhance safety and, of course, improved ROI. Standing and modernizing the traditional grid alone, however, is not enough to keep pace with the speed of AI infrastructure deployment. To accelerate time to power, hyperscalers are increasingly exploring dedicated microgrids which are opening up additional avenues of growth for ADI. We believe this trend of $100 million plus energy business, which began inflecting in 2025 and delivering accelerating growth this year also.

Importantly, our strong and growing positions across both energy and data center make us a more critical AI ecosystem player spanning the entire electricity value chain from generation, transmission and storage to distribution through rack power and ultimately, processor power delivery, essentially the vascular system of the data center.

Now once the grid mix contact with the data center, AI's extreme energy and information density requirements make ADI's deep expertise and innovation in high-performance power management, sensing and telemetry as well as optical connectivity even more critical. So let me start with our optical franchise as I begin to unpack for you how we're growing our data center business and opportunity by helping our customers resolve the tremendous challenges of energy and information density. When we think about the journey of data through the infrastructure, there are 2 critical pathways, the data path of electro optics and the control path, which guides, optimizes and ensures the integrity of the data path.

Our focus is on the control path where we've been setting and extending the industry's performance envelope for decades. Today, the complexity of efficiently moving data at ever higher speeds within and between RECs and across data center campuses is growing exponentially. Customers are increasingly relying on ADI to provide essential timing, power management, data conversion, monitoring and control capabilities that enable lasers and transceivers to operate with precision reliably, efficiently and at the necessary scale for AI workloads.

And as customers seek to further increase the amount of optical lanes, signaled bandwidth or both, to accelerate network speeds from 800 gig to 3.2 terabits per second. We believe that we're very well positioned to benefit threefold from unit growth in pluggables and coherent light modules increasing BOM content and greater share as these transitions unfold. As new architectures, such as optical circuit switching and co-packaged optics gained traction in next-generation large-scale AI clusters Complexity expands even further and our long-term opportunity continues to grow. Based on current design wins and customer commitments, our OCS revenue is poised to approximately double this year and we're targeting a similar level of growth in '27.

In the nascent CPO space, which we view as a semi-tender, the criticality of ADI's precision control technology further increases as thermal and serviceability challenges rise. So in short, the combination of market growth, expanding content, increasing share and differentiated value creation across data center optics reinforces our confidence that this segment will remain a strong growth vector for ADI over the coming years.

Now let me turn to our power franchise. The need for customers to convert and deliver precise increasing levels of power at the rack and compute layers efficiently and safely is driving continued broad-based growth across our portfolio. Customers are leveraging ADI's products and solutions to push for greater than 98% conversion efficiencies, multi-kilowatt power delivery with peak power levels up to 2x the rated load and comprehensive protection, telemetry and fault recording capabilities that enhance system reliability and maximize uptime.

To put just one of those differentiators in context, the 1% difference between 97% and 98% efficiency may not sound like very much, but a 97% conversion efficiency loses roughly 50% more energy through heat than a 98% solution. Over time, of course, that difference compounds in terms of the need for additional cooling infrastructure, stress on equipment and operating costs. And we believe our opportunity will continue to grow substantially as power density demands of AI clusters continue to increase. The industry's architectural transition toward 800-volt DC power distribution, for example, plays directly into ADI's power management expertise and portfolio.

And we're seeing a significant design and uptick for our protection and 800-volt to intermediate power conversion technologies, which can deliver 20 kilowatts of power at industry-leading power densities exceeding 2.5 kilowatts per cubic inch. And at the intermediate to core conversion layer, which is one of the fastest and largest growing analog opportunities in the AI era, our combination of advanced power conversion, intelligent system control and real-time telemetry is critical to achieving the necessary power density, efficiency and reliability requirements for next-generation processors to operate at 6,000 amps and sub 1 volt.

Our Empower acquisition further enhances ADI's vertical power story by enabling us to take power into the processor package itself. In large-scale AI deployments, these architectural advantages can reduce compute power consumption and temperature by approximately 10% to 15%, which equates to roughly $30 million in annual savings in a 1 gigawatt data center. As with optical, our power pipeline is growing rapidly, and the direction and rate of our R&D investments reflects our belief in the size of the SAM opportunity before us and our confidence that data center power can remain a strong growth vector for ADI over the coming years.

So in summary, we believe the architectural shifts underpinning the evolving AI era are increasing ADI's role as a critical partner across the-grid-to-chip ecosystem and driving extraordinary opportunity. Our current assessment is that our 2030 data center and energy set has more than doubled from what we had envisioned just 1 year ago. This dramatic expansion is not simply a function of increased AI infrastructure CapEx. It reflects the impact of new markets and architectures that require orders of magnitude more analog content delivered via higher-value solutions.

Now stepping back to frame this growth on the larger landscape of ADI's continued evolution, grid to chip is but 1 facet of the first generation of AI characterized by applications largely focused on data centers. The ATE growth we've recently spoke to on these calls is yet another facet. As great as the impact of Generation 1 AI has been so far for ADI. However, we continue to believe that the bigger prize may be in the second generation as AI extends its reach from the data center to the physical world in the form of pervasive robotics, digital health, autonomous mobility and so on and so forth. In this now emerging phase, AI must not only support higher level learning and analytics, but also real-time sensing, inference and responsiveness to complex real-world signals.

Our ability to tackle this challenge through our products and solutions and edge-based reasoning informed by deep physical intelligence will extend our AI value proposition across the entire addressable space. We're able to pursue this horizon of AI opportunity as a result of the tremendous optionality built into ADI's business model, which is designed to support both upside growth asymmetry as well as cyclical downside resiliency. This optionality is founded by leveraging our cutting-edge technology stack and domain expertise at the electrophysical interface as well as long-term partnerships with our customers. Our success in AI to date is the latest proof point, and I believe the best is yet to come.

And with that, I will hand it over to Rich.

Thank you, Vince, and let me add my welcome to our third quarter earnings call. Revenue in the third quarter was $4.02 billion, finishing above the high end of our outlook and increasing 11% sequentially and 40% year-over-year. Growth was broad-based across markets and regions. Industrial, which represented 49% of our third quarter revenue finished up 10% sequentially and 53% year-over-year. We saw year-over-year growth across all our industrial businesses, led by ATE, electronic test and measurement, aerospace and defense and automation.

Automotive represented 25% of revenue, finishing up 14% sequentially and 16% year-over-year. Our higher content and share positions globally continue to result in growth well above SAAR. We are seeing diversified strength across customers and products in key secular growth areas, including next-gen AS and infotainment systems and also in electric powertrains.

Communications represented 16% of revenue, finishing up 18% sequentially and 84% year-over-year. Data Center, which now accounts for 80% of our communications revenue continued to accelerate with more than 100% year-over-year growth in both optical and power.

In Wireless, we delivered more than 25% year-over-year growth as we continue to execute against cyclical tailwinds.

Lastly, Consumer represented 10% of quarterly revenue, flat sequentially and up 6% year-over-year. Our diversified consumer business showed strong resilience despite memory-driven challenges. We achieved year-over-year growth across smartphones, hearables and wearables and saw accelerated growth in our B2B like Prosumer franchise.

Now on to the rest of the P&L. Third quarter gross margin was 72.5%, down 50 basis points sequentially and up 330 basis points on a year-over-year basis, driven by higher revenue, utilization and favorable mix. OpEx in the quarter was $907 million, resulting in an operating margin at the high end of our outlook or 50%, which is up 100 basis points sequentially and 780 basis points year-over-year driven by improved gross margin and execution discipline. Nonoperating expenses were $69 million, and the tax rate for the quarter was 13.1%. All told, EPS finished at the high end of our outlook for a record $3.45, up 12% sequentially and 68% 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 decreased to $2.3 billion, driven by the successful closing of our Empower Semiconductor acquisition on July 7, where we paid $1.5 billion in an all-cash transaction. Our net leverage ratio now sits at 0.9.

We increased inventory $83 million sequentially as we continue to build strategic die bank to support accelerating demand. We exited fiscal Q3 with record balance sheet inventory and increased inventory at our distributors. Despite the increases, our days declined to 156 and channel weeks fell below our 6- to 7-week target. Over the trailing 12 months, operating cash flow and CapEx were $5.5 billion and $0.6 billion, respectively. We continue to expect fiscal '26 CapEx to be within our long-term model of 4% to 6% of revenue.

Free cash flow over the trailing 12 months was a record $4.9 billion or 36% of revenue. Over that same period, we returned more than 100% to shareholders through dividends and share repurchases. As a reminder, the durability and strength of our financial model allows us to target 100% free cash flow return over the long term, aiming to use 40% to 60% to support our annual dividend and the remainder for share count reduction.

Now moving on to our fourth quarter outlook. Revenue is expected to be $4.3 billion, plus or minus $100 million. Operating margin at the midpoint is expected to be 52%, plus or minus 100 basis points. We expect nonoperating expenses of approximately $80 million and a tax rate of 12% to 14%. Based on these inputs, adjusted EPS is expected to be $3.86 plus or minus $0.15.

In closing, our record results and outlook underscore our ability to capitalize on cyclical and secular tailwinds across the AI ecosystem, defense, core industrial and automotive markets. We will continue to balance execution discipline with strategic growth investments to navigate a dynamic macro and geopolitical environment while delivering on our attractive financial model.

With that, I'll give it back to Jeff for Q&A.

Thank you, Rich. Now I'll get to our Q&A session. [Operator Instructions] With that, operator, can we have our first question, please?

[Operator Instructions] Our first question comes from Harlan Sur with JPMorgan.

Congratulations on the continued solid execution. On the strong operating margin guidance and therefore, strong implied gross margins, I'm sort of rolling up to about 73.5% gross margin by October, 100 basis points improvement your utilizations are already at high levels. You've talked about mix and volume as the primary drivers going forward. Are these 2 dynamics driving most of the 100 basis points plus step-up in gross margins in October? Or the team implementing more price increases beyond the actions that you took at the beginning of the year, and this is also maybe contributing to the strong gross margin profile as well?

Thanks for the question, Harlan. I'll take this one. So -- as we described for Q3, gross margin came in as expected. We are actually expecting a gross margin increase of about 150 bps to about 74%. And we're spot on, this is driven by favorable mix. higher fixed cost absorption, obviously, following the higher revenue and our price adjustment.

So if we look to sort of medium term, I'd remind you that we do have a seasonal shutdown coming up in our first quarter, which does create some drag on gross margin and are expecting more cost increases coming. Inflation is still a persistent factor.

That said, the full extent of our price action, which has been announced is not captured in Q4. So we will get a full quarter of shipments in Q1 with some trailing impact as we review contracts. So overall, we see margin -- gross margin hanging in at the Q4 exit level as long as we maintain the revenue and mix that we expect.

Our next question comes from Vivek Arya with Bank of America Securities.

Vincent, I'm very interested to hear your thoughts about fiscal '27. If I look over the last 2 years, ADI's top line has accelerated think almost every quarter on a year-on-year basis. And how much of that do you think has been kind of secular? How much of that has been cyclical? And how much of that has been rising? And if I were to just take you outlook midpoint and just assume normal seasonality, it suggests at least like a 20% or so plus growth year into fiscal '27. So just curious to hear what your high-level thoughts are? Are there any areas of constraint. And if I could seeking something related to that, is there more operating leverage left if indeed, your top line were to grow 20%?

Well, we'll take the rest of the call, Vivek, to answer those questions. So what I'll say is, let me unpack a little bit of the story and then Rich can add some of his own commentary as well. So since we called the bottom in the second quarter of '24, we're seeing our particular strengths manifest through the following kind of areas. So we're clearly a beneficiary of the defense and the AI summer cycles, which I think will persist for many, many years to come. Who knows what the trajectories will look like. But the -- right now, the aerospace and defense, the ATE and data center business is there about 30% of ADI and our portfolio is exposed and I think, poised for greater growth and more content and more share gains.

Of course, we're gaining share right across the spectrum of the car types, the combustion as well as EVs. Also in consumer, we turned a corner in consumer 2 or 3 years ago, and we're seeing both content and share gains there right across the high end -- mid- to high-end smartphone, gaming, hearables, wearables and so on and so forth. I've mentioned several times before as well, the Maxim synergies. So we had said our expectation when we announced the acquisition of Maxim that we would generate $1 billion worth of synergies while we're well on track. We'll go about $700 million this year. And I expect that we'll hit $1 billion plus in 2017 as well.

So I think as well -- the overall cyclical tailwind, I think, is also very, very strong across the board. And given the breadth of our portfolio, that lifts the -- all the boats aside from the symmetric tailwinds that we have. And as Rich talked a little bit about as well, the -- we've got a very favorable backdrop in terms of pricing. And so I think we've capitalized on the vectors of growth. And I think our portfolio is more critical than ever to our customers. I will point out as well that our lead times are in good shape. As Rich said, we are sitting on record inventories, but at the same time, our inventories are very intentionally placed built in place. And that's thanks to the manufacturing agility that we've built in with our hybrid model and that we continue to extend the scope of.

So Rich, maybe you want to add a little more color.

Yes. I guess, Vivek, what I would add is, as we've been talking about this, the inventory position, the important piece to consider is with the significant demand we're seeing, we still think that we have not seen really any restocking activity from inventory from our customers. They continue to run very lean. And I think that our work over the last 2 years to balance out the inventory, both on our balance and in the channel has really been helpful. So we, obviously, look into the next quarter, we will continue to stage more inventory in the channel given the acceleration going there. So I think there's still a lot of opportunity.

And if you look at where we are from a consumption pattern, as Vince described, those 3 big secular drivers that are specific to our business, we can see real end demand, right? We're seeing the massive increase in AI infrastructure spend. We're seeing the aerospace and defense business grow. So if you extract those pieces out and then look at the broader parts of our business, most of our business is still shipping well below historical consumption levels. So we think we're still have room here on both the cyclical part of the upturn when we look at the broader markets I just described, and we continue to see strength across obviously the aerospace, defense, ATE and data center businesses.

So I think, in summary, we believe we're very, very well positioned as a company. But I think the things that are under our control, I think we're executing well on. But there's a lot of things that can happen with the macro. There's heightened geopolitical risk and rate hikes, of course, there's a lot of volatility, as we all know, in the financial markets. perhaps AI CapEx could slower decrease. But all that said, our expectation is that we'll have a brisk growth year in '27.

Our next question comes from Stacy Rasgon with Bernstein Research.

On the data center side, you said that 80% of your comm business was now data center, which I found interesting. And I mean that data center leases, I don't know it's doubling, is growing 100%. Is that the kind of growth rate I ought to be thinking about now for at least the comm segment next year '27 given the vast majority of this data center? Do you think that, that comp segment should be growing close to 100% year-over-year as I start to think about '27? And I guess maybe within that question, if you could give us any color on what you're expecting for the segment, at least in the near term into Q4, that would be helpful as well.

Yes, Stacy, maybe we'll start with the near-term stuff and kind of the end market outlook, and then we can maybe pass it to, Vince, for the AI outlook or the data center.

Yes. So yes, I guess I can take the one. So basically, at the midpoint of our outlook, we're expecting industrial to be up high single digits communications to lead the growth, obviously, led by data center up about 10%, consumer up high single digits and automotive to be up low single digits. And then as for the growth in kind of animal data center, which is basically your question, just on a longer-term basis, at a high level, there's many growth vectors.

First of all, the market is strong. the end market is growing double digits. If you look at CapEx, what have you? And then importantly, as Vince talked to on his call, right, the analog BOM content is increasing significantly, particularly as we transition to 800-volt, et cetera. And obviously, we're -- the investments we're making, if we're targeting to increase share in a lot of places, right? So at a high level, we expect strength in data center for multiple years to come.

Yes. So I think, Stacy, rather than give you a number for '27, we're almost double on a pace to be 2x in '26. And my sense is that we'll see an extended runway to at least 2030 for strong double-digit growth across the data center market as well as the energy space, by the way, which today is about $0.5 billion revenue for ADI. I think by the end of the decade, that business will double.

Our next question comes from Tore Svanberg with Stifel.

Vince, I had a bit of a longer-term question for you as it relates to analog. I mean it's an industry that historically has grown high single digits. But with analog now benefiting typically more from a infrastructure and then to your point, eventually from physical AI. Should we assume that the underlying growth of the analog industry is clearly shifting upwards here, both from a unit and a pricing perspective?

Yes. I think it is -- tore, thanks for the question. I think it's possible for the analog to be in the double-digit zone compounded for several years to come. And you just look at data center alone, if I just take data center, there's expected to be 100 gigawatts equivalent infrastructure built for data centers between now and kind of 2031. Each gigawatt generates $1 billion to $1.5 billion analog set, and the problems are becoming more complicated in data center. So it's going to increase the sophistication and the pricing capabilities of the solution. So my sense is it's not unreasonable. We had in our earnings day, which was what 2021, I think it was, we had said we thought our business could grow 5% to 7%. And we're contemplating something higher in the out years from here.

Our next question comes from Mark Lipacis with Evercore.

Great. And maybe if I could follow up on that. And Vince, thanks for putting a number out there and a double-digit range. The last time ADI revenues were above that long-term 5% to 7% trend line was back in the late '90s, early 2000. And there were similar arguments being made about the build-out of the Internet, and there's telecom deregulation. And I'm wondering, Vince, if you could just go back in time and compare what is the difference between the secular dynamics you see today and what many people saw back then. We tend to bringing analog renews, not just yours but the industry back down to that 5% to 7%.

Yes. I think first off, because I looked through that myself, the concentration was much -- was quite high at the time. What I'm seeing now, I mean, if you look at the industry and the intervening period of time, more and more intelligence has been brought into the world of information technology, more edge, more intelligent edge. And that's increased, I think just the SAM, the TAM and the SAM for the analog sector with every bit of information that's been processed. The value of that content has increased with every bit every watt.

And so what we're seeing -- and if you look at ADI, just as a company, the portfolio, the breadth of our portfolio, the depth of our portfolio, the number of places in which we play is far, far greater. So as I said in my prepared remarks, what we've built into this company's business model is optionality. We get to pick or the markets chooses for the asymmetries. And then we have these compounding businesses that make the company extremely resilient. So I think from our perspective, the industry is just -- it's broader, it's deeper. Analog is much, much more important. And the whole -- we think over the next 25, 50 years, a lot of economic growth is going to be built on externalized intelligence. The gravity field of AI pulling everything with it.

But I think the pervasiveness of what the analog industry offers now in general is much, much greater, and we've got this gravity field, irrespective of what might happen from a cyclical perspective in the coming years. My sense is we have never ever had a cycle like we've now got, just its breadth, its depth and the gravity field over to pull it along.

Our next question comes from Blayne Curtis with Jefferies.

I wanted to ask, just going back to the data center, but I guess in the past, you referred to AI exposure that includes ATE. Just trying to -- as you look at the growth calculus and you have the data center part growing triple digits, curious how to frame the opportunity for ATE, and I don't know if you're willing to break out how big that was.

Yes, Blayne. So in the past, you're right. We've talked about the AI exposure as ATE plus our data center business. Combined, those are 20% of ADI. Without giving numbers for 4 years growth, I mean I think clearly, we've got a lot of confidence, which importantly is backed up by our design and activity, right? It's not just hopes and dreams. If we look at our pipeline, the design activity with customers is strong in ATE as well as across data center, not just in Power but optical as well, right? I think you heard Vince on the prepared remarks.

So at a high level, I mean, that 20% of ADI has got a really strong growth tailwind behind us. And we feel like it's multiyear, right? And that's -- and again, that's confidence because of our design activity, because of our backlog, our pipeline and the bookings momentum.

Our next question comes from Matthew Prisco with Cantor.

Lots of talk about this really strong demand backdrop for years to come. So how do we think about ADI's supply capabilities today as these revenues continue to hire? At what point do we need to start thinking about capacity additions? And are there any constraints arising in the supply chain today or any areas that you see potential pressure as we move forward?

Yes. Well, clearly -- Rich?

Yes. Sure. I'll start, Matt, and then Vince maybe can talk some more about the longer term peaks. But from our perspective, we really are executing well from supply chains. As we've talked about, we've been able to deliver above seasonal growth for 9 straight quarters, and we're guiding to a tenth. We're continuing to build inventory, reflecting our ability to expand our internal capacity, as we've talked about. We continue to install new tools in available spaces as we are -- and we're also getting more wafers externally. So we feel like we're very well positioned for the near and medium-term demand.

And obviously, across the industry, there's some soft spots and lead times have started to extend but we're working really hard to keep them in check. Obviously, this demand acceleration is pretty unprecedented in recent memory. But we think we're very well positioned. We have a book-to-bill as we've talked about, that's above 1. We're not in that sort of unusually high space from a book-to-bill perspective. We are also -- and this helps us from a manufacturing efficiency perspective. We are getting a bit better visibility. We have some more orders coming in a bit longer term.

Now frankly, we asked our customers to help us by doing that. It gives us the ability to be more precise in leveraging the capacity we have. So we think we feel like we're in a good position. We do continue to add capacity as we go I'll give my sense. We are scenario planning what this could look like if this kind of growth sustains and how we would balance across our hybrid manufacturing with additional external wafers, but also whether we need to add capacity beyond what we're already doing and have been doing for the last 3 to 4 years.

Yes. I think in addition, not only do we look to continue to increase the scope of our internal manufacturing capabilities. We have a number of great partners externally as well that we work with, both on the front end and back end. So we're, I would say, jointly planning with our partners to take a long view to how we support all the various nodes that are critical to ADI from lithographically insensitive nodes, if you like, kind of 6 micrometers, that kind of level right down to 5 nanometers and 3 nanometers. So that's what we did during the covert cycle, just that we continue to extend the capability of that hybrid manufacturing system, that is our strategy going ahead.

And just remember, a couple of years ago, it was expected that the semi industry in totality reached $1 trillion by 2030. Well, that's kind of in the wake at this point, and we're looking to something much, much bigger. So the industry has a big, big task to get ahead of what we now think the new growth trajectory is, including ADI.

We'll take our last question, please.

And our last question comes from Joshua Buchalter with TD Cowen.

Congratulations on the very strong results in guidance. The 74% gross margin outlook is pretty staggering and back to the 2022 peak levels. It's also coming with all that much incremental utilization tour. I guess bigger picture, through cycle, is that a number that you think you can sort of hold and grow off of? And I guess, as we think longer term, can you speak to how you're prioritizing revenue growth versus margins, if you are? Like is this low to mid-70% level, one that you intend to manage to long term, I guess?

Sure. So I do think, as I previously mentioned, Josh, we can continue to grow -- excuse me, continue to maintain that sort of roughly 74% level. And we will continue to focus, and I said this in the last call, we will continue to focus on growth investments, which some of them may put some pressure on margins as we expand revenue growth dollars -- but when you look at the balance of our portfolio and the parts of the portfolio that continue to grow, the opportunity to maintain that margin exists.

We are getting, as you mentioned, a ton of benefit by running the factories at the higher utilizations, which we expect will sustain throughout this up cycle. So we feel pretty good and we're going to balance the investments we need to make to grow with maintaining that relatively maintaining that margin. I said this last quarter, and I'll repeat it here. I don't think, for instance, there's a ton of room to get more margin accretion out of utilization. But we are still only in a 49% industrial mix. So if the mix shifts, there's potential for upside or at least to be able to offset any potential headwinds. Because the other thing that is going to happen is we expect that the inflationary environment will continue. Now we'll continue to monitor and track and focus on that as we have historically. But I do think we're in a pretty balanced position for the medium and long term here.

Yes, I think just one other comment. I mean, the origin of the high gross margin structures is the innovation premium that we attract. So our job is to keep that premium moving. And then the cycles help get the efficiency in manufacturing. So those 2 things. One is obviously, very strategic and the other operational. But those 2 parts we see having a lot of legs for a lot of years to come. Our customers are asking us to tackle more difficult problems, take on more of the work, so to speak, and the breadth and the depth of the high-performance portfolio have positioned us well to continue to make that early stage, the origin of the gross margin continuing critical part of ADI's value proposition.

This concludes the question-and-answer session. I'd now like to turn it back to Jeff Ambrosi for closing remarks.

Thanks, everyone, for joining us. A copy of the 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, investor.analog.com.

Thank you for your continued interest in Analog Devices. And have a good day.

This concludes today's Analog Devices conference call. You may now disconnect.

Really delighted to have the team from Analog Devices join us this morning. Rich Puccio, the Chief Financial Officer. We'll go through my list of questions, but please feel free to raise your hand if you would like to bring up anything. But really a warm welcome to you, Rich. Really appreciate you doing this conference.

Thanks, Vivek. Thanks for having us. We appreciate the opportunity.

Wonderful. So maybe let's just start with kind of the state of the union, right? Semi is, I guess, an understatement. Things are quite exciting. Your business has gone through really stepped up, right, in terms of your growth. So maybe just walk us through how things have evolved since the start of the year, what you expected, what you're seeing right now, and then we can walk through the different end markets.

Sure. So I'd say we've been on a journey since the trough of the cycle. And we talked about this, and I've talked about this in prior calls, right? We've had some actually pretty resilient parts of our business that started to show signs of growth as early as the back half of '24. We continue to see -- continue to see demand in that area grow, those idiosyncratic areas. I'll go back to those in a minute. But what we had talked about was we were waiting to see the sort of cycle recovery and what were the signs we would look for in the cycle recovery. And probably 3, 4 quarters ago, I started to talk about what we really haven't seen yet cycle-wise was the growth in the mass market, broad market part of the industry.

And we have now seen over multiple quarters, very significant growth in the mass market part of the business, which for us is one of those classic signs of the up cycle. So I would say, as we were progressing throughout the year, we were expecting to see the cycle growth add to the idiosyncratic growth, right? And we've talked about that we were very strong already in [ ATE, ] aerospace and defense and some of the stuff that was going on in data center and our communications business. And I think what's been a couple of things that from an overall perspective that have been, I don't necessarily surprising, but I guess that probably is the best word. The continued acceleration in the ramp in the AI infrastructure spend. And I really should just say infrastructure spend because they are also building non-AI data centers out there, but broadly, the infrastructure spend.

And the other thing that we're seeing happening, and we're just starting to see this now is sort of this halo effect from that infrastructure build impacting the other parts and the other end markets that we serve. So whether it's in the industrial space, the companies that are helping build the infrastructure, whether it's the electric infrastructure, the power infrastructure, et cetera. So in addition to the core products that we've been selling into the data centers, we're starting to see demand in other parts of the end market. I think that's been one of the nice upside pieces of this for us from an overall perspective. And the other area, and I'm sure we'll talk more about this, for us that we saw some acceleration earlier than we expected was in automotive. We had said coming out of Q1, despite what we were seeing for the early results in '26 that we were still expecting auto to be a growth business for us.

Even coming off a record '25, we expect that we could grow year-over-year. And we saw some more evidence of that with some pretty aggressive acceleration in orders in the back half of the last month of our last quarter and some record levels in a couple of our jurisdictions. So those are some pretty positive areas where we did even better than we had thought. And we already had a pretty aggressive view of how we would perform in those areas.

Got it. How do you assess, Rich, I think you have a unique perspective on the space, right, having come in from an outsider, right, perspective into this Analog industry. So when you look at the quality of orders, the quality of backlog, how do you make sure that it's not double ordering? How do you make sure that this is -- these are not pull forward just because everyone is constrained on a relative basis, it might be easier to buy Analog products versus, say, leading-edge logic or DRAM. So how do you assess that?

So a couple of things. When we look at it in a number of ways, one of the things we always look at is we always are mindful of what the long-term trend across semis has been and where we are relative to that growth line, right? Because when you start to ship above that growth, that consumption line is when you're potentially starting to build inventory. And that's something we focus on. We do not think we're there, right? And a good example is industrial, right? It's 50% of our business. It was the one that declined the most. It's also the one that's been growing really strong. But when you look at that business, we're very lean in the channel. We're running a leaner channel than we've run historically in that sort of 6 to 7 weeks, and our channel is predominantly an industrial business.

The other thing we look at is just look at the ordering patterns and demand. So if you think 40% of our industrial, for instance, when you look at that, that demand is coming from aerospace, defense and infrastructure. Those are areas where we can clearly go to the end markets and see what is driving that demand, right? And we think that, that is ordering to the current period demand because they're growing so fast. So we feel very good about that. But then that leaves 60% of our industrial business. You say, how good do you feel about the growth and the longevity and the legs for that? Well, 60% of our industrial business is still approximately 20% below its prior peaks and below that consumption line, right, which means there's still certainly room to run across the broader part of the industrial. And then you go down to the next end market, communications.

Obviously, we talked about -- I talked about on the call, it's now -- data center is now 3/4 of our communications business, and that is growing aggressively with the infrastructure build-out. Again, so I feel good that, that's real demand for actual build-out. And if you listen to the hyperscalers and the platform companies, CEOs talk, what's constraining them from growing? Is capacity. So we haven't even scratched the itch for existing demand with capacity. So they're continuing to build. So I feel like that is also real demand. And then you look at auto and you look at what's going on, where are vehicles trending to grow more and where for us, ADI specifically, do you see bigger content opportunities? Obviously, EVs for us, we've talked about give us the best content opportunities. China EVs continue to grow. Even if units stay flat there, given their drive for penetration into Level 2 ADAS, right, they're talking about trying to move from 10% penetrated in Level 2 ADAS to 20% to 30%.

So each jump in that penetration creates more content for ADI in the vehicles they're producing. And so that shows up in how our auto business has grown, right? Auto today is -- China auto is 30% of our business, record year last year, running very strong again this year. And over a trend line period, if you look over 10 years, even in a flat SAAR environment, we grow low double digits. Over the last 5 years, as the ADAS and immersive cabin experiences have expanded, our business actually grows 15% better than the SAAR units.

Now in the current environment, our best information would say that SAAR numbers are probably going to be down to close to '24 levels. So we don't -- we're not basing our growth expectation on units. It is our share and our content. And the other piece of data that is really helpful that we can look at, you can look at the percentage of Analog parts, not Analog devices, but Analog parts in vehicles, over time and over the last couple of years, you started to see a decline in the dollar value of that content, ADIs has continued to increase, which we think is one of those good evidence points that, in fact, we have been gaining share.

And so the strength in that market has been really positive for us. So -- and I don't feel like we've yet seen any of that inventory build behavior. We did in '25, see buy ahead behavior in auto, but we feel like they have burned through that and they are now buying back to their normal demand in the period.

Got it. Another, I think, aspect that I would give your team a lot of credit for is actually being very upfront in calling out where you -- when you do see that buy-ahead behavior and even quantifying it and then also quantifying right, where pricing is, right? So I think your team deserves. What kind of operational things are you instituting to give you better visibility, right? I mean you have a great AWS background. So how many of those tools are you kind of implementing, right, or tools like them are you implementing to catch, again, back to the question of the quality of the demand and backlog that you're seeing?

So it's interesting. Our team has always -- actually, when I arrived, has had an amazing amount of statistical data and tracking around bookings and order rates and backlog, track very closely some of the most important metrics we look at. We are also building forecasting tools, leveraging more of the AI, which I think everybody is doing at this point to be able to give us better signal because one of the -- and this is a double-edged sword. One of the good things is we've kept lead times pretty well in check, right? We've talked about it in the past, we have kept -- the vast majority of our product goes out inside normal lead times. We have had some minor stretch in some of the real high mover areas. But in that environment, and this is one of the lessons I learned on the other side, in that environment where the lead times stay in check, you don't have a lot of motivation to put orders on the books early. So we see that.

Now what we started to see is we're getting more orders out a quarter beyond where we would historically have had them as things appear to be getting tighter broadly across Analog. So I think what we then have to rely on, and these are the things our teams work really hard on is being close to customers to get their outlook on forecast, right? Because if you think about our process, we're building wafers -- starting wafers now for 2 quarters out. We don't have 100% of that all booked into backlog, right? We work aggressively. And mechanistically, what our teams are doing every day is getting to customers and encouraging them, look, we're getting your forecast, but your best way to help us all manage as an industry, your production requirements is get orders in.

So we are starting to see a little bit more visibility from an orders perspective, Vivek, just because folks are starting to get more visibility that they're on a sustained growth trajectory. But there still is a little bit of -- we have to be able to get -- continue to get better and better forecast data to map up with the historical and backlog. But I think we're -- we've done a really good job. Our team is -- our manufacturing and global ops teams have been very agile. You've seen we've been able to capture a whole bunch of upside. We just posted a record quarter. We've guided another record quarter. So we've been able to capture that. And we've done that while working pretty aggressively to improve our efficiencies, make sure we're getting the most out of the factories. One of the other things we talked a little bit about as we think about the need in this growing demand is we've been expanding capacity now since back to the -- I think the big push started in around '22.

We said we would double our internal capacity. We would expand the amount of product that we've qualified externally so that it gives us some flexibility. And essentially, by the end of this fiscal year, we'll have completed that sort of doubling of capacity. Now obviously, just as part of the normal running the company go-forward CapEx model, we've talked about a 4% to 6% CapEx model. If I take your Street numbers for this year and next year, you're talking about ongoing capital probably in the $700-ish million, which we will continue to look for optimization, improvement, replacing and modernizing tools, expanding capacity as we continue to see this growth, right?

The macro indicators, as we've all talked about there, we're talking about semis being a $1 trillion industry in 2030. I think we're going to be $1.2 trillion or $1.3 trillion part of the economy this year. So we are continuing to expand our capacity. Even if you look at our production this year, we add wafer -- incremental wafer starts every quarter, right, as we continue to add more tooling to keep up.

And obviously, we have very strong foundry partnerships where we've got -- we've had no problem getting the capacity we need. I mean I would say the challenge we're all having going forward is getting more capacity out of those will become expensive.

Got it. On pricing, it seems that the industry took a lot of pricing in, I think, '22 and '23, then not as much in '24 and '25. And now we are starting to see almost everyone start to send letters about where is ADI in terms of taking pricing? How much of this is catch-up from just the last 2 years where it was subdued? How much of this is just the inflationary pressure that you are seeing?

So I guess there's 2 pieces to this. One is our pricing philosophy has always been dynamic. But I think the anchor piece of our pricing has always been, we lead with innovation. We tend to be there first with the solutions for the hardest, most complex problems where you need domain expertise and product expertise, and we're able to capture a ton of value there. So you see that, right? We've talked about having ASPs that are 4x the industry average, right? Another -- look at that, that we look at that is very informative is we look at our products because as you all know, we have products that produce revenue for 25 years. But if we look at and cut our products and say those that were 10 years and older and 10 years and younger, ASPs are basically double in the 10 years and younger because we continue to add more solutions, more features, more functionality, and we capture more of that value.

So that is what primarily drives our pricing. However, we always watch the cost inputs as we go. And you hit the nail right on the head. We had, for a period of time, been absorbing pretty significant inflation in a few areas. And we made the determination given it was going to continue that this was the right time to go recover some of that. Now this was not a go improve our margin strategy. I mean we're basically trying to hold the margin given the inflation, whether that was significant inflation in gold in the more near-term period here, it's fuel, which means transportation, et cetera. And as we think going forward from a pricing perspective, it will continue to be dynamic. We will continue to watch the inputs and outputs because there's still a lot of uncertainty, right? We don't know what the resolution is going to be in the situation in the Middle East. The longer that lasts, the more knock-on effects that's going to have in the supply chain, right?

Because it's obvious when straight-up fuel costs go up, we can all see that, but there's an awful lot of things that are petroleum-based that are part of the manufacturing process, particularly in the back end. So we'll continue to watch, and it will be dynamic. But the other thing, important thing around the pricing, you're absolutely right. In 2022, there were massive industry-wide pricing increases. I think TSMC did a big price increase and everybody passed it along. But what's been different for us is, as we've talked about, our pricing has remained pretty stable across '24, '25. And then we just did our sort of first big price increase in '26. Now we've talked in the past, we've always had some back and forth on pricing dynamics because of our legacy products that stay around forever, get price uplifts, things like that. But this is our first broad increase.

We'll continue to watch the dynamic. right? Because we're trying to be prudent and fair to our customers while also trying to maintain the financial model you all expect from us.

Got it. Do you think some of your competitors in, let's say, power semis or other areas are actually taking on pricing even more aggressively than ADI? And if yes, do you think that gives you an opportunity? Or do you think you would rather just keep the pricing envelope you have right now to just expand market share? How do you think about just kind of both sides of that?

So certainly, I've seen copies of probably all the same letters you've seen for what our competitors are doing from pricing without doing a detailed scrub of their cost structures. I don't know if they're margin stacking to get incremental profitability out of the pricing or if they're recovering. But for us, look, we want to be fair to customers, and we're going to continue to look at what the cost environment is and where we think it's appropriate that the customer share and some of the inflationary pain, we might have incremental price increases.

But I would say, strategically, like I said, we're trying to get -- recover from the cost we've had historically and we will continue to go forward. But for us, the really important pricing piece is what we do in the design-in phase because that stuff tends to be sticky, and that's where our innovation premium shows up. So that's going to be the more important part of pricing.

Got it. And just the last question there, Rich, which is I just want to clarify that the pricing is not because of shortages. It is because of passing along the cost inflation aspect. What is it because of true shortages? Because you mentioned your lead times haven't really changed.

No, this was not because of shortages. Certainly, like everyone, there are places in the supply chain where things have gotten tighter, but our supply chains have worked to figure that out, and we've been able to keep up with product demand. We've had, as I mentioned, some small extension of lead times in a few places, but the majority of our stuff is still inside standard lead times. So this is not a supply shortage, so we're increasing your price. This is -- has been -- we've been absorbing costs on your behalf for a while. And we did a really good job offsetting a lot of them. You've seen that. We've had margin accretion pretty continuously coming out of the trough, but we were doing that while also absorbing pretty significant inflation over that period.

Got you. Okay. Now let's talk about the data center across your power and optics and your ATE business, right? It's close to 20%, right, of sales, which I think is probably the highest, right, if not the highest, among, right, your analog peers. So talk to us about how do you see the sustainability of that growth, right? Among those 3 areas, is there a way to kind of rank order where you're seeing faster growth versus kind of more industry growth in line with the industry?

Sure. I mean, look, everything -- everything I see and read and everything you probably all see and read is that the AI. The infrastructure build-out is going to continue. And I have heard from any number of sources, including from some of your colleagues that the expectation is at least out into 2030 and 2030 plus we'll continue to need to build infrastructure because we still have demand. The hyperscalers and platform players still have demand they can't fulfill. So I think that, that will continue to drive growth for us. If I look at -- obviously, ATE will continue to grow, and you can look at the big ATE providers to see what that looks like. And for us, we've been talking about the power and the optical are pretty much equal parts of our data center portfolio.

And I think we talked about it being 3/4 of our business. If I were to pick which one of those today, I think has the bigger growth opportunity, given the strength of our position in optical, I think the power one provides a potential opportunity for bigger growth, right? If you look at us as a player in the lateral power versus what we could be in vertical power, I think there's a big growth opportunity there. One of the things our team saw was this move continues to see and you're seeing in the industry is the move to higher and higher voltages. The move to 800 volts is going to drive increased demand for products to be able to -- particularly to be able to deliver that sort of last millimeter to the chip, right?

And what we're seeing is the technologies out there, one of the ones we talked about is this IVR technology that comes within power. that can reduce power consumption 10% to 15%. It also reduces the footprint of that module underneath module is probably not the right word. The footprint on the board, it also eliminates some of the ancillary structures that have existed in the current vertical power and makes it a highly efficient structure. So we think our opportunity to be in there as an early player gives us a chance to be a much bigger player in vertical power. Now when you think about how we know if we're being successful there, obviously, part of it is going to be, do we see this continued shift to a vertical power architecture. I think 6, 9 months ago, we were talking about having one win in and people were starting to use vertical power.

More and more of the discussions I have and our data center team is having is vertical power is going to be a key part of this build. We are going to continue to be power constrained. Science has not caught up yet to fulfill all the power requirements if you look out 10, 12 years. So reducing power loss in the data centers will be critical. Vertical power seems to be the architecture for that. So we'll be watching eagerly along with every other power provider, what happens in the architectural design.

And then getting in early, and this is the same in any of these spaces for us, getting in early at the first rev is where you get to learn and be part of the discussions for what the next rev looks like because you look out to 2030 and the next evolution of power and the next evolution of what you have to do, those are going to be massive TAM and SAM expansions for companies because if the architecture shifts from where it is today and they build at the rate they're building, and I'm sure one of your guys is building a model right now that can tell us how many data centers they're going to build, how many racks, how many servers, which means how many VP vertical power units are going to sell, and you'll tell me that when you have it.

So we can plan. That's going to be the metric we'll watch in the industry is, how aggressive is this architecture adopted as we move into the higher voltages? Because we've all heard that we're going to pump x megawatts, even a gigawatt into it in the future. That's going to put tons of pressure on the power chain. And I think that's an area where end-to- end of the chain, we're very strong and getting that last millimeter with IVR will give us an advantage.

Got it. So I know that ADI is well represented in one of kind of the custom right GPU-like projects. What's your opportunity in kind of the broader merchant GPU-like projects? And I guess the bigger question, Rich, is that those GPU customers have multiyear kind of product pipelines that are planned out. How early do you get the visibility about your level of engagement, your market share, right? How do you think about that visibility over the next several years?

So as we've talked about, we've had products in -- whether it's in vertical power or optical that get into the large players, whether they're the platform players or the suppliers into the platform players. So we'll continue to be aggressive because as I mentioned, getting into the earliest version of products gives you the learning cycles to be part of the road map. So getting early engagement in those. And so we'll continue to watch. Obviously, where we have wins, we'll be working to get more wins across the peer set. So we feel pretty well positioned. And I would tell you, the relationship we have across those companies are very good. They bring us in very early because it's not getting any easier to build any of these products. And what they want is somebody to help simplify the complexity. And so the more of that we can do for these customers, the more chances we're going to get to win. So I feel like we're very well positioned there, and our team is aggressively going after it. And I've been involved in a number of conversations already with hyperscalers.

Our teams are working across a bunch of the companies to be able to make sure we're positioned across the portfolio to support that scale-out.

Got it. One other thing in a different area, this is now related to automotive. I found very interesting is that in your last earnings call, it almost seemed like, and you just mentioned it as well, that automotive suddenly started to grow, which is very different than the sense I had when the year started, right, that auto was going to be kind of a subdued year. So did that suddenly change? Or was it always according to plan, but -- or did you really see a shift in auto demand?

So for us, we actually -- and there was a lot of skepticism. I will admit when we talk to investors after Q1 and told people, hey, Q1 was a little bit better. It's softer than seasonal, but it was better than we expected. Q2, we thought we would still be maybe working off a little bit of this prebuy but we thought the back half would be strong because we can clearly see our share gain and the content acceleration that's happening in auto. And if you look at what's going on in the Middle East, it's going to certainly put more pressure on people buying electric vehicles. The more electric vehicles, the more demand.

So we have always thought from the start of the year that we would grow. If you talk to our -- the team that runs our auto business, they would have told you, we will -- despite a record in '25, we will grow year-over-year in auto. What happened was we saw an acceleration literally in the last month of the quarter in auto demand that we were expecting to come in Q3. And I think as they look to the adoption of more and more of the L2 ADAS and potentially L3 ADAS in China by the end of the year, I think we started to see an order pick up. And as you said, I'll be transparent. We've always been transparent with what we see in the order book. But in this one, we didn't think this was a prebuy. We could see the content increasing and the very specific drive. Now on top of that, and that's the China piece, we had record revenues in Europe and Japan auto.

So the U.S. is still not doing that. It's been a bit of the laggard. But the other thing that happened, which was good, we expected it, but it's also another indicator is we hadn't grown -- actually, we had declining BMS for 2 years. We just had our first year-over-year growth quarter in BMS in 2 years. And that's really important for us. And that's indicative of the EV, right, because it's the far right of the EVs is where we get the most out of our BMS. So that's been really important for us on the auto side.

So it's time to declare the bottom of the auto cycle also, and it's -- or do you want to see some more data points before...

I don't know. It's interesting. It depends how you define the cycle because every forecast I see still shows auto units coming down, probably closer to '24 levels, which were -- because obviously, '25 came up a little bit from '24 back down to '24. So I don't know if the units has bottomed out, but certainly for us, the content share is continuing to allow us to grow.

Got it. Okay. Next thing on the aerospace and defense business, right, which has been pretty strong. There's a lot of media reports about the U.S. potentially, right, and other countries potentially wanting to build out, right, the stock of all products. Do you see that in your business also? Do you have that visibility that shows that aerospace and defense can continue to...

Yes. Certainly, there's been public discussion about a number of programs, certainly in the U.S. where the government is going to expand. And we have very good visibility. In fact, in addition to -- as you talked about some of the AI data center stuff, we're starting to get a little bit more visibility on aerospace and defense. But I would say it's not just a U.S. phenomenon. If you look at what's going on globally, there's going to be build-out across the EU as they've upped their spending budgets.

Even we're starting to see more upping of budgets in APAC and so the aerospace and defense business for us has been a strong grower, and we expect it to continue. And the interesting thing for us is we have obviously a very strong part in the defense part of that. But we also do have a good presence in the space part of aerospace and defense, right? So from -- obviously, some of the products that we're well known for from a comms perspective and the technologies there. So we're going to see -- continue to see growth in LEOs, where we have content in LEOs, right? There's all kinds of press. You read it every day about the number of satellites that are continuing to get launched. Plus we have a lot of product in the base stations that communicate with the satellites. So it's a pretty broad brush growth for us.

But one of the great things is that we have a very broad portfolio that is used across a broad spectrum, but we also -- and we've talked about this in prior calls, Vince has talked about it, our ability to deliver systems and modules into that market is an incredible value capture for us because, again, they don't want to build if they don't have to, they want to get a module and our continued ability to go up the stack is what's helping us drive bigger and bigger ASPs on the ADAS side. So we feel like that is one of those areas that is going to have sustained momentum just given even if things settle down calmly, there's still going to need to be a rebuild and replenish phase. So that helps us get some visibility, and we feel like our product portfolio is well positioned there.

Got it. Last 2 very quick ones. Gross margins, we saw, right? You had that onetime kind of 50 basis point benefit from pricing, but it's kind of held on to the 72.5%, right, which is the best in the industry. Are there still incremental opportunities to expand that? And then I have one final one on use of cash.

Sure. So I would say, yes, but I would -- what I would say is probably different is if you go trough to peak, we've gotten a significant benefit of driving utilizations up to more optimum levels than we would have been at the trough. I would say going forward, more of the incremental gross margin improvement will come from further mix change. At this point, we're about a 50% industrial business. At peak margins, we were 53% -- between 53% and 54% industrial. So I would say the 2 things that will do it will be mix and then just pure revenue growth given the flow-through economics and the fact that we have been growing at very high rates and been managing the cost curves pretty aggressively. So I do think there is continued opportunity for accretion. I just don't expect increase in utilization to be one of those drivers. I think I mentioned that on the call.

Got you. And the last one, Rich, on just kind of use of cash. So ADI historically has done larger strategic, right, M&A. It seems now the focus has shifted a little more to kind of tuck-ins, right, and so forth. So as you look over the next several years, do you think there is still opportunity for more industry consolidation? Or we should expect ADI to just kind of focus on kind of smaller tuck-in type deals?

I think the large consolidations that you talk about continue to be more difficult just given the current concentration and regulatory environment. But for us, and we've talked about this, right, we're focused on, one, the revenue synergies that we've been talking about. And if you haven't heard me say this before, we're on track to deliver $1 billion of synergies by '27. In fact, we did hundreds of millions in '25, and we're going to do hundreds of millions more in '26. I think that's really important. But we are continuing to aggressively invest internally in software and digital capabilities and AI. And those will be areas we continue to look. And that's an opportunity where we've talked about where if they can help us solve an existing problem, help us get to market faster, help us do more for customers.

Those are the kind of acquisitions we're looking at. Empower is a good example, right? It gave us a massive acceleration on the time line for a technology that we think is going to be a really important technology for the power delivery going forward. So that will continue to be our core philosophy is make sure we get all those synergies and then evaluate digital software and AI opportunities as they come through.

Got it. Terrific.

Thank you so much, Rich. Really appreciate it. Thanks, everyone.

Great to see you. Thanks, everybody.

Good morning, and welcome to the Analog Devices Second Quarter Fiscal Year 2026 Earnings Conference Call, which is being audio webcast via telephone and over the web. I'd now like to introduce your host for today's call, Mr. Jeff Ambrosi, Head of Investor Relations. Sir, the floor is yours.

Thank you, Jonathan, and good morning, everybody. Thank you for joining our second quarter fiscal 2026 conference call. Joining me today is ADI's CEO and Chair, Vincent Roche; and ADI's CFO, Richard Puccio.

For anyone who missed the release, you can find it at investor.analog.com, along with related financial schedules. 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. 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 will turn the call over to ADI's CEO and Chair, Vincent Roche.

Thanks very much, Jeff, and a very good morning to you all. Well, as you've seen by now, second quarter revenue profitability and earnings per share finished above the high end of our guidance, establishing new high water marks for both revenue and for earnings. Despite the quarter's heightened geopolitical tensions and ongoing macroeconomic challenges, we're currently seeing record demand for our products and solutions. It's at times like these when our dynamic hybrid manufacturing model performance. Our robust investments over recent years have enhanced the scale and the optionality of our supply chain, enabling ADI to address demand surges and capture upside.

The combination of this supply agility and resilience and our robust R&D investments across core Analog segments as well as digital software and AI, form the foundation for our growing criticality to our customers. They also enable us pursue areas that we believe offer the greatest future growth potential for ADI, namely AI-driven computing and connectivity, autonomy, proactive health care sustainable energy transition and immersive consumer experience.

As I mentioned last quarter, our data center and ATE businesses are taking advantage of strong AI-driven infrastructure investments to achieve new highs. These 2 businesses are on steep growth trajectories. And as we move through 2026, our confidence in their continued growth into '27 is increasing.

Another robust growth market for ADI is our aerospace and defense business, which reached a new revenue high this quarter, and where increased focus on national sovereignty concerns is accelerating an already strong multiyear growth path. In general, Industrial, which includes ATE as well as aerospace and defense is our most profitable business with 15- to 20-year average product life cycles. We continue to outperform in this space. So today, I'd like to unpack more of that story for you by focusing on our industrial business beyond ATE and aerospace and defense, namely automation, electronic test and measurement, sustainable energy, health care and the broad market.

Collectively, these markets have grown more than 40% in the first half of fiscal '26. Customers across these sectors are consuming more semiconductors with each new product generation. And from a cyclical perspective, these businesses are still well below their prior cycle highs with lean channel inventories. This combination of secular and cyclical positioning, along with strong demand signals gives us confidence that all of our industrial sectors are poised for continued strong growth in the coming quarters and indeed over the longer term.

So now going a little deeper into these markets. I'll begin with our automation business. Numerous megatrends, including the onshoring of advanced manufacturing and evolving labor dynamics are increasing demand for digital factories and next-generation robots. The digital factory vision is unlocking new opportunities for ADI and our portfolio of high-performance sensing, signal chain, power management and connectivity solutions. We're enabling the edge intelligence and real-time communication necessary in automated semiconductor fabs, biopharma, data centers and other discrete and process manufacturing environments, for example.

Additionally, as robots make up ever larger percentages of investments in factories and elsewhere, our higher-value products and subsystems for content-rich robotics are adding automation fast recovery. Longer term, humanoid and other advanced robotics modalities are steadily increasing our opportunity pipeline value. Overall, we believe we're well positioned to continue capitalizing on automation's tailwinds today and in the future as automation transitions to autonomy.

Turning now to our electronic test and measurement, our ETM business. While ATE systems are geared to enable efficient high-volume manufacturing of chips and electronic systems, supports end-to-end product development and delivery from R&D prototyping, debugging and validation all the way through mass production. In areas such as AI, EVs and secure communications, for example, ETM is a highly diversified performance-driven market. And ADI's innovative RF mixed signal and power solutions have built our strong position in high-value applications and are propelling our growth in our design pipeline as customers grapple with increasing levels of complexity and shrinking innovation cycles.

Switching now to our Energy business, the continued evolution of consumption patterns due to deeper electrification and high-performance computing, for example, is putting immense pressure on legacy electrical grids and creating profound challenges from energy generation to transmission distribution, storage and of course, consumption. Customers trust ADI to accurately monitor meter and manage all levels of the grid. We reliably convert real-world environmental and system data into digital information, delivering the essential edge intelligence, connectivity and power management solutions today's systems require.

Notably, we're also leveraging our high-performance battery management platform to support the energy storage systems that are increasingly crucial to a stable grid. Demand for our BMS portfolio from our ESS customers continues to be strong in '26, having grown more than 50% in fiscal '25. In short, our technology helps customers upgrade electrical infrastructure, ingest and manage the intermittency of renewable resources and smoothy energy demand spikes from applications like EVs, AI and so on and so forth. As the trend of electrification accelerates and demand patterns continue to evolve we believe energy will continue its growth trajectory for many, many years to come.

Turning next to healthcare, where our technologies and solutions protect and save lives across both clinical and nonclinical care settings each and every day. We're enabling the ongoing digitalization of clinical environments through the combination of our deep domain expertise and breadth of technological capabilities across hardware, software and advanced packaging. We're seeing secular growth in, for example, advanced imaging, patient monitoring and surgical robotic applications where high-performance-driven solutions are further extending our leadership position. And as health care increasingly migrates beyond clinical to nonclinical environments, demand is accelerating for our wearable solutions for outpatient management of, for example, cardiopulmonary and metabolic conditions, essentially extending the digital network edge all the way to the surface of the human body. We're driving double-digit revenue growth in our health care market and we expect continued growth over the coming years due to increasing design-ins with larger OEMs this year.

Turning finally to our broad market industrial business. which has returned to robust growth. This market encompasses a long tail of tens of thousands of established and emerging companies who are addressing a vast array of applications. The tremendous breadth of these customers' needs aligns perfectly with the extensive scope of our diversified, performance-leading technologies and application-ready solutions spanning center to cloud, nanowatts to kilowatts and antenna to bits.

Now before I conclude my remarks today, let me speak briefly about our planned acquisition of Empower Semiconductor, which will further augment our power technology portfolio and provide the final piece of our comprehensive grid to core power platform. With Empower, we gained cutting-edge proprietary integrated voltage regulator or IVR technology and silicon capacitors that enable us to offer true vertical power delivery to our customers. The extreme power density of Empower's platforms eliminates customers' needs for bulky external components, shrinks their power footprint by up to 4x slashes their data center compute power consumption by an estimated 10% to 15% and delivers the ultrafast transient response required by volatile AI workloads. This transaction will expand ADI's total addressable market within the hypergrowth AI accelerator space and further solidify our position as an indispensable hardware partner in the drive for maximum compute density per server rec. And we look forward to sharing more of our vision in this exciting space. When the transaction closes, a little later following regulatory approval.

So in closing, we believe our industrial end market is currently in a cycle of broad-based, high-growth that has been further compounded by our strong investments in the most attractive secular opportunities. As ADI works to bring physical intelligence to the electrophysical interface, our competitive advantage lies in our extensive and evolving tech stack and 6 decades of experience as well as our deep application domain expertise. These differentiators continue to grow in importance as our customers tackle bigger, more complex challenges at the intelligent edge. And as such, our confidence in our future has never been greater.

And with that, I'll pass you over to Rich.

Thank you, Vince, and let me add my welcome to our second quarter earnings call. Revenue in the second quarter was a record $3.62 billion, finishing above the high end of our outlook, while growing 15% sequentially and 37% year-over-year. Growth was led by our industrial and data center businesses. Industrial, which represented 50% of our second quarter revenue finished up 20% sequentially and 56% year-over-year. All of our industrial businesses increased sequentially and year-over-year, led by aerospace and defense, ATE, ETM and the broad market. Automotive represented 24% of revenue, finishing up 8% sequentially and 2% year-over-year. We continue to capitalize globally on content and share gains in next-generation ADAS and infotainment systems with increased demand for GMSL, functionally safe power and A2B technologies.

In addition, our BMS solutions for EVs returned to year-over-year growth for the first time in 2 years. Communications represented 15% of revenue, finishing up 22% sequentially and 79% year-over-year. Data center, which now accounts for more than 75% of our communications revenue was up more than 90% year-over-year, driven by both our optical and power portfolios. In our wireless business, we continue to see increasing demand growing more than 35% year-over-year.

And lastly, consumer represented 11% of quarterly revenue, flat sequentially and up 23% year-over-year. Continued strong growth reflects our exposure to the high-end consumer space and ongoing cyclical tailwinds in our B2B like Prosumer business.

Now on to the rest of the P&L. Second quarter gross margin was 73%, up 180 basis points sequentially and 360 basis points year-over-year driven by favorable mix, higher utilization and pricing, the quarter was $872 million, resulting in an operating margin above the high end of our guidance or 49%, up 350 basis points sequentially and 780 basis points year-over-year. Nonoperating expenses were $57 million and the tax rate for the quarter was 11.8%. The -- all told, EPS was a record $3.09, up 26% sequentially and 67% 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 $3.4 billion and our net leverage ratio remains 0.8 Inventory increased $81 million sequentially as we continue to build strategic die bank and finished goods buffers to support growing demand. Days of inventory finished at 168 while channel inventory weeks declined remaining within our 6- to 7-week range. Over the trailing 12 months, operating cash flow and CapEx were $5.1 billion and $0.5 billion, respectively.

We continue to expect fiscal '26 CapEx to be within our long-term model of 4% to 6% of revenue. Free cash flow over the trailing 12 months was $4.6 billion or 36% of revenue. Over the same period, we returned $5 billion to shareholders through dividends and share repurchases. This robust cash return reflects the strength of our innovation-driven financial model and our continued commitment to disciplined capital allocation. 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 third quarter outlook. Revenue is expected to be $3.9 billion, plus or minus $100 million. Operating margin at the midpoint is expected to be 49%, 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 $3.30 plus or minus $0.15.

In closing, we delivered a strong quarter supported by disciplined execution and broad-based demand across all of our end markets. We continue to see constructive demand signals in our order book and backlog particularly in industrial, AI-related applications and automotive. While we remain mindful of the dynamic macro and geopolitical environment, we believe we are well positioned to continue executing against both cyclical and secular opportunities.

With that, I'll give it back to Jeff for Q&A.

Thank you, Rich. Let's get to our Q&A session. [Operator Instructions] And with that, operator, can we please have our first question?

[Operator Instructions] And our first question for today comes from the line of Tore Svanberg from Stifel.

Congratulations on the record results. Vince, I was hoping you could talk a little bit about the conversations that you're having with your customers. It seems like demand is very, very strong. I'm sure supply capacity is becoming increasingly a concern for your customers. But -- how are they basically approaching your business at this point? Are they worried about supply? Are they giving you more visibility as far as build plans? Any color there would be great.

Yes. Thanks, Tore. So yes, I think, generally speaking, I would say the atmosphere is one of general cabinets with our customers, there are some concerns, of course, around the choke points in the semiconductor supply chain, memory being one of those. So that's, I think, having most effect on consumer customers, we've got to make choices.

But I think, generally speaking, our lead times are in pretty good shape. Our demand book is increasing. But we have a lot more capacity as well than we had, say, pre the covid cycle. We've more than doubled the the internal capacity, and we have a lot more optionality built in as well to the external supply sources of the process technology that we're not building inside the company. So I think it's -- I think it's a pretty -- it's a reasonably calm environment. There is concern that at the steepness of the demand ramp across the industry and what that will mean, say, going into '27. But we have a lot of flexibility and resiliency built into our particular supply chain.

So we have a lot more upside that we can take on to our order books and keep a very good service score with our customers. And there are places story where we are seeing more -- a little more stress than others. But generally speaking, I think we're in good shape.

And our next question comes from the line of Vivek Arya from Bank of America Securities.

Vince, I'm curious how you're approaching pricing both from kind of a tactical and strategic perspective. So -- on the tactical side, what are you assuming in terms of pricing for your current quarter outlook and just the second half in general? And we have heard several of your competitors just start to send letters on increasing pricing. So how are you kind of viewing pricing in the near term? And then longer term, how sustainable will these pricing moves be? And do you think some of your competitors who have internal capacity, can they use this inflationary environment to take share. So I just would love your perspective on both kind of the tactical and the longer-term aspect of it.

Yes. Thank you. So yes, I think let me start with the short term. We have increased prices during the course of this year. And essentially, what we're trying to do is just absorb the cost of inflation in our business. And that's something that we'll address. We'll keep an eye on the inflationary effects at the input to our business, and we will offset those costs as necessary. So I think in terms of the longer term, we, as a company, we've got the highest ASP by far in the industry across the entire portfolio. we're at 4x, 5x the industry average. And with each new generation of innovation that we're bringing to market, we capture we capture more value.

So actually, in the newer part of our -- the newer products in our portfolio, those products are capturing more and more value, and that's reflected in the ASPs. And what's the stickiness, I think, was the other part of your question. the answer very simply is very sticky because our products have very long life cycles. And the most competitive part of the cycle for ADI is capturing the initial design in. When we get that design, substitution is effectively 0, competitive substitution is effectively 0. So with a long product life cycle portfolio. I think we're in a strong position to hold the gains that we make. Rich, do you want to...

Yes, Vivek I would just add because I think the 1 of the questions you asked the tactical pricing piece, which we talked about in the last quarter, actually came through as expected in the results. So everything that was above the midpoint of our guide was actually due to the volume, not incremental price. So the pricing played out as we expected. And if you think about a full year look of the pricing actions that we've previously described will add a couple of points to our growth rate in '26.

And our next question in our next question comes from the line of Joe Moore from Morgan Stanley.

The 90% growth that you talked about in the data center portion of communications, can you kind of update us on growth trends within both the optical and power side of that? And just how should we think about growth there going forward if you're doing tuck-in acquisitions that can expand the TAM on the power side?

Sure. So Joe, I'll take that one. So as I mentioned, with the data center piece be in 75% of our comms and the 90% growth. Actually, that is being fueled pretty much equally by similar growth rates across both the power and optical portfolios. So those are both continuing to to trend very well with strong orders and strong results in the quarter. And given the momentum we're seeing, we really do expect this to continue to increase and be the fastest growing sequentially for us as we look out into the next quarter.

And our next question comes from the line of Joshua Buchalter from TD Cowen.

Maybe following up a little bit on Vivek. Could you walk through what's implied for gross margins in the fiscal third quarter? Maybe like help us understand the levers across pricing, mix and utilization. I know that the 50 basis points of inventory true-up that won't repeat, but how should we think about gross margins in the third quarter?

Thanks, Josh. So obviously, starting with the 73% gross margin, which was even a little higher than we expected based on some better mix and utilization. And as I mentioned, the pricing impact was pretty much as expected. For Q3, we are assuming about a 50 bps decline in gross margin, largely driven by the absence of that onetime benefit we got from repricing the channel during the prior quarter, obviously.

And from a mix perspective, we do expect it's likely to be a slight tailwind based on our outlook. While as I mentioned previously, utilization is expected to be fairly neutral. The future -- we don't see a ton of future upside on gross margin from utilization given where we're running the factories today. So that's how we're thinking about it here in the near term, Josh.

And our next question comes from the line of Matthew Prisco from Cantor.

I guess just how are you seeing the segments tracking into the July quarter today? And maybe how are you thinking about the back half of the calendar year based on your visibility?

Sure. So I'll just start with a quick recap, obviously. For Q2, Industrial came in as expected, right up 20% sequentially. And then we saw upside everywhere else, it's notably in auto and data center. One of the things we talked about is the continuing strength in data center. We're also starting to see better results than expected in auto. Consumer continues to show incredible resilience despite the consumer sentiment and some of the inflationary pressures. But as we look out, we do expect to see some impact there. So if we look at what -- we think at the midpoint of the guide, what we expect to see in Q3 is continued above seasonal growth across industrial, automotive and communications.

So from an industrial and automotive perspective, we'd expect to grow sort of mid- to high single digits sequentially. From a comps perspective, we expect to be our fastest grower, up low mid-teens, low to mid-teens sequentially. Consumer is expected to be down single digits sequentially for us based on some of the things I just described. And then important baked into that outlook is also a flat channel inventory weeks. We don't tend to guide out obviously beyond the next quarter, but I will just remind you from a seasonality perspective, the fourth quarter for us is usually up in the low single digits. As we -- and so that's the best outlook we have right now for the back half of '26.

Our next question comes from the line of Stacy Rasgon from Bernstein Research.

I wanted to drill just a little bit more into the gross margins -- so I understand the driver in the quarter, I understand the guidance. We that range sort of likely to see outcomes given utilizations are maxed -- it sounds like if you're going to get more revenue upside from here, that would suggest that you're going to have to do more outsourcing given the flexible manufacturing I guess I'm just trying to -- I guess is that logic correct? Is that sort of, I guess, the local peak on gross margins we ought to be thinking about at least in the near term on the current revenue trajectory?

Yes. I actually think that's the right way to think about it. Near term, this is probably the right way to think about the guided gross margins is the right way to think about it. Obviously, any more significant mix shift from a growth perspective could change that. But given where we see that outlook for Q3 and the potential trend into Q4, I think that's the right way to think about it.

Is data center higher gross margin like industrial? Or is it more in line or is it lower or what that to be the biggest driver of mix.

Yes. Overall, the comms business, which includes that data center chunk is an above corporate average business for us.

And our next question comes from the line of William Stein from Truth Securities.

Since I was sort of surprised by the Empower acquisition. I would have expected ADI's heritage strength there, but certainly, it's acquisitions of Linear, Maxim by extension Volterra would have provided the company a big advantage in sort of all the technical capabilities in power management. So what did Empower have that ADI decided was to special that it needed to acquire instead of developing it internally?

Yes. Good question. I mean, first off, the power space is very dynamic. It has never been a stress from a technology portfolio standpoint for everybody. So I mean, what did -- so we're building intelligent power systems. We're using the breadth of the capabilities that we acquired over the Maxim and LTC eras. And our customers are putting enormous demands on us to solve their problems across the board, right from the the ingress to the data center down to the chip. And the reason that we acquired Empower is that there was a gap in that portfolio and time is of the essence. And the biggest bottleneck that is creating for us today is we've got to sell for power density and delivery efficiency. And we have to move closer to the core of the problem, which is done at the XPU, the GPU, the CPU and so on and so forth.

And as I said, time is of the essence. And we bought some -- we're buying some critical and very, very unique intellectual property. The integrated voltage reg and the capacitor of technology. These are critical building blocks and essential for to solve our problem to solve our customers' problems on time and be able to catch the wave. So we've been building a portfolio, vertical power portfolio. That is the future, I believe, in terms of the raw architecture. And Empower gets us further up the the value chain more quickly to solve more problems more completely for our customers. That's essentially it. And there's a lot of new TAM that we capture with this technology as well. So it's highly complementary. Well, that's the point in a space where performance demands are effectively uncut.

Our next question comes from the line of Chris Caso from Wolfe Research.

Yes. If I could just follow up on Empower a bit as well. And can you speak -- is there any revenue associated with that acquisition right now? And I'm sure you're planning for the IP and the engineering team, but are there any design wins in the pipeline? And when maybe provide a time line for when you would be -- expect to be able to integrate that technology into the core of ADI's product line?

That was a lot of questions. I'll start with -- if they stay on their trajectory, we will see some -- there'll be some amount of revenue upon closing in the back half of our year. It will certainly not be material to us in that regard. But as mentioned, it opens up a massive opportunity for significant revenue growth in the go forward, particularly as it relates to the IVR technology. So we would expect that the perspective on the time line, Vince, how fast we get there.

No. I mean in [indiscernible] a fairly small amount of revenue -- so it's kind of in the post revenue phase, but '27 is when we expect to start seeing the surge in demand. There is a lot of design-ins in train at this point in time. The combination of Empower with ADI's large manufacturing and go-to-market capabilities will enable us to get to more places more quickly and get into production much, much faster. So I think you will see revenue significant revenue in 2027.

Our next question comes from the line of Tom O'Malley from Barclays.

I wanted to zoom in on auto a bit more stronger than expected. You're kind of hearing across the supply chain that coming out of the pandemic, you've moved from this kind of just in case and just-in-time mentality to switching to basically holding more inventory at Tier 1s and OEMs. And I'm just curious, when you're looking at where the strength is coming from in auto today. Are you seeing some restocking at those end customers? I've heard it's kind of a mixed bag. Some guys are above targets. Some guys are materially below -- are you seeing this kind of phenomenon where guys are slowly moving back to the range that you saw kind of prior to the pandemic? And then any area that you would call out specifically as a growth driver in auto, just given the broader backdrop being weaker? Any areas specific to ADI that are a little bit stronger. I know that's a couple.

Thanks for the question, Tom. Great question. Maybe I'll give a little bit of a background on some of the details -- some of the detailed part of what we've seen growing and what we're seeing in our customer base and I'll work my way down to your question about inventory because that obviously is an area we pay a significant amount of attention to given some of the challenges companies had burning off the inventory.

But as we look at our auto business, right? I think I've talked about this before. It has compounded double digits for us for 10-plus years. In fact it grows even faster over the last 5 years. And a lot of that is being driven by content gains or all of that being really driven by content gains and share gains because of the units we've talked about haven't changed.

Now what's really important for us is our gains are in the ADI and next-gen infotainment systems. So you think about our products like GMSL, functional safe power and -- those have been really important investments where we've continued to see a ton of growth. Now we have talked about this in the past. We saw some tariff-related pull-ins back in '25 that we thought might weigh on our first half. We certainly saw that unfold in Q1 with the below seasonal. And we were expecting -- I mentioned this on the last call, another below seasonal quarter as a result. However, and ended up favorable and reflected regular seasonality. And if you recall last quarter, and there was some skepticism, I think, we thought we indicated a stronger second half and that we would grow auto '26.

That strength, which we were expecting to come through in our second half came a bit sooner, right, led by a material pickup in China during the back part of the quarter and that drove a significant part of our Q2 upside. While China was still decline quarter-over-quarter, all of our other regions were up, including record performance in Europe and Japan, which resulted in a record quarter for our automotive business.

And back to the inventory question a little bit, I was pleased to share over the first time in 2 years, we saw our BMS revenue grow up double digits year-over-year, and we are optimistic in continued growth for BMS driven by further EV penetration in Europe and China specifically and we continue to hear that the China penetration is increasing fast and that they're going to start deploying even higher levels of ADAS. We expect to see L3 ADAS and some of the China vehicles by the end of the year.

So these are all strong positive things for us. And as we look out in Q3, right, we have record bookings, positive book-to-bill. And so we do expect to see above seasonal growth sort of in that mid-, high single digits. We are pretty confident in the outlook for the rest of the year for us in auto. Now on the inventory buildup question, we're not seeing that yet, right? After the digestion, which we talked about, particularly in BMS, we feel like automotive customers are fairly lean on inventory, at least the ones we talk to and which is very supportive of our growth expectation going forward.

And our final question for today comes from the line of Tore Svanberg from Stifel.

I just have a quick follow-up. So I think there's increasing concern about capacity, especially external capacity, given what's happening on the digital side of things. So I don't know if you're willing to share with us numerically how much capacity you have internally and externally, meaning how much revenue you could generate -- and how do you plan to grow that over the next few years, especially now that you're growing more than 30%.

Yes. So we've talked about the work we've done to double our internal capacity and obviously continue to expand our partnerships. And we are comfortable that we have the capacity to support up to the $20 billion that we've been talking about as part of our 2030 vision. And obviously, just as part of our normal refresh in CapEx management cycle, we're continuing to look at opportunities to increase efficiency but also opportunities to build some additional internal capacity as needed, right? That's just part of the normal dynamics we go through on the on the internal side. And then obviously, externally, we've got very strong relationships. And to date, we have not had trouble expanding across that. Clearly, there are more tightness in some of the nodes but we have not yet been unable to get the capacity we've needed.

Yes. Tore, we've been building both internally and externally, optionality externally, we've put a lot of geographical optionality in play, which gives us more capacity plus the resiliency that our customers are looking for. So -- we still have a lot of upside on the current base revenue of ADI, both internally and externally.

Thanks, Tore. Thanks, everyone, for joining us today. 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, investor.analog.com, and thank you for your continued interest in Analog Devices.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.

All right. Welcome back, everybody. I'm Joe Moore, Morgan Stanley Semiconductor Research. Very happy to have Richard Puccio, EVP and CFO of Analog Devices. Rich, thanks for coming.

Thanks for having us.

So maybe just start off with kind of where we are in the cycle. You've had 9 consecutive quarters of above seasonal performance. You've got some idiosyncratic growth, some kind of early-stage cyclical drivers. Can you just give us a general sense of where we are in all of this?

Sure. I'll start with the idiosyncratic because if you -- I'll do a little bit of a walk back to where we thought this started. We talked about 6 quarters ago that we had some pretty resilient parts of our business that we're starting to show some growth, and we expected we'd start to see real sequential growth. And a lot of that was being driven by a couple of real strong performers.

So from an idiosyncratic perspective, you've probably heard me talk about a couple of these. We've had real strength in our ATE business, which is one of the sub-elements of our industrial end market, obviously, fueled by the continued demand for high-performance compute and high-bandwidth memory, which requires more complex testing, which means they need sophisticated testers. We have a very strong position in ATE. So that has been a very strong market for us. I think we talked about that business growing year-over-year in '25 over 40% and continuing to go strong into current year.

You look at our aerospace and defense business, we've talked about that business in the size that it's reached. That was a very resilient business. That one also has pretty strong tailwinds in the market given the increased spending we're expecting to see from the U.S. government on military and aerospace spending and also the increased levels we're expecting to see in Europe. So those were really strong drivers in the 2 parts of our Industrial business.

Then if you look at another business that has been growing really strong for us, grew in the back half of '25, the last 3 quarters, 50% year-over-year, and it's continuing to grow is our data center business. So when you look at that externally, you see that in our communications. So our communications business is about 2/3 of our data -- 2/3 of that is our data center business. And that business has been very strong also given the massive expansions in CapEx. So that has been a really strong business.

On the auto side, if you think about where we've seen success, that has been a strong business for us. If you look at the sort of cycle dynamics, that was actually a business for us that only went down low single digits from peak to trough. And despite that, we've now had back-to-back record years. So we are very well positioned there. And then the story there is we've captured share. We have great content gain, and we are a strong player in the Chinese auto market and a lot of the growth that's been happening in auto has been in the Chinese market. So that has been really strong for us.

And then if you look at our consumer business, we've talked about the pretty significant diversification of our business. And I think our share gain there, the number of new sockets that we had ramping has played a big part. Consumer was one of our first businesses to come into the -- back into a high-growth mode and has grown for 6-plus straight quarters and has had continuing expansion. So it's not the old very heavily tied to handsets. It's now handsets, it's hearables, wearables, gaming platforms. So a bit more diversified portfolio, and we feel like that one is really well positioned.

So those are things that I would have said are idiosyncratic where we've picked up share. We have a product that's leading in a space. The cyclical piece for us, we talked about one of the things we had been waiting to see was the return of our -- the mass market in our industrial, right, our broad market business. And we were able to see that start to pick up and it started picking up in the middle part of '25 and started to accelerate. And classic cyclical upcycle trend for us is we can track -- we do track down to the part level. And we could see at the beginning as we started to grow, but we didn't feel like we were in the upcycle, a significant number of parts we would have sold in the normal up cycle, we're still not moving.

We're at a point now where 90% of the parts that we would expect -- 90-plus percent of the parts, we would expect to be moving in the up cycle are moving. The other thing is we were pretty aggressive, as you all know, for 2 years, leaning out the channel and both our customers directly and our channel inventories at our disties. So we can see in the ordering patterns now that they have clearly worked through the inventory hangover across -- broadly across those spaces, and we're seeing that in the order patterns. And we're seeing it in the acceleration of our turns business because, one, we have pretty regular lead times now so they can order in quarter for things in quarter. And turns volumes has been very strong, another cyclical upside indicator.

So if you think across both, we've had some really good activity all at the same time, while we've been building more resiliency into our manufacturing processes, expanding capacity, et cetera. So we feel pretty good. And I think that's a big part of what we've been seeing.

Yes. You guys have managed through all of that really well, both the idiosyncratic and the cyclical. So maybe we could drill down on some of those things. Starting on the industrial idiosyncratic drivers, ATE, I think you talked about 30% sequential growth this quarter. Markets really worried about AI sustainability beyond 2026. What kind of visibility are you getting into that ramp? And do you feel like good about that growth? Do you feel like there's some risk of an overshoot at some point?

Well, first, if you -- one of the signals we always watch and pay very close attention to is if you look across the sort of large platform/hyperscaler companies and what they're forecasting for CapEx, right? So we all waited anxiously to see what would happen during the most recent Q4 announcements, and they lined up to each say how much more they were going to spend, and they'd more revenue if they could build more capacity. So I think the short to medium term, I don't think that we're going to see any drop-off in that AI capital spend. So I think that is going to be a strong tailwind for a period.

At some point in the future, maybe they don't, if technologies improve, the power availability and data center demand will probably -- those lines will get closer and closer, and that might be an inflection point, but I don't think we're anywhere near that yet. So I think -- and from a visibility perspective, just purely for us, obviously, we have what our customers publicly say and what we talk to them about. But from a firm orders sort of backlog thing, as we've talked about before, we got about a quarter's worth of visibility, particularly given normalized lead times.

Yes. And then from the bottlenecks that the GPU guys are seeing from test capacity, there seems to be a pretty clear visibility there. Yes. And then aerospace and defense probably premature to talk about the events in the couple of days. But there seems like there's a very strong long-term tailwind there from the automation kind of edge AI happening in that business. How much have you invested in that business? You mentioned last night about Hittite and some of the benefits of those businesses. What's the long-term growth profile there?

So that is -- for us, we think that is one of our subsegments in industrial that will continue to grow above company average. We're very well positioned across the spectrum in aerospace and defense, whether it is in the RF and microwave that you might find in guidance systems, whether it's our products that are going into satellites, both GEO and LEO satellites. So we feel like there is a lot of macro tailwind there, right? As I mentioned, the spending in aerospace and defense is going up around the world. And I think we've got a really good position there. So I think we'll continue to benefit there.

We also -- you see this, and this is a really good example in ADI of our ability to capture more value is you mentioned Hittite and you go back to something that -- where we might have been selling components into a prime. Now we're selling more modules and more solutions, and those capture significantly higher value for us. And aerospace and defense is one of those really good examples inside of ADI, where our ability to provide a full solution has created a tremendous amount of value for us. And I think that's important. One of the things -- and this applies everywhere else, but it certainly applies in aerospace and defense. Our ability to provide solutions to the most complex problems is what allows us to capture that higher ASP and higher value.

Okay. Great. And then other segments, instrumentation, medical devices, the energy part of the business, those seem like they're a little bit more of a gradual cyclical recovery, but any puts and takes, any areas of strength or weakness to note there?

So it's interesting. We were clearly 2 of our subsegments have been leading the charge. But as we talked about as we progressed into the back half of last year, we got to a point where across all of our industrial subsectors, the ones you mentioned and across all of our geographies, we were seeing growth, right? And when we exited -- just recently exit Q1 and think about what we're looking out at Q2 with positive book-to-bills across all of the industrial submarkets, and that's by all geographies.

And that is before any impact from the Q1 price increases. We still had book-to-bills above 1. And as we start to think about where we are in the cycle and our ability to continue to sort of get additional benefit despite talking about having ATE and aerospace and defense and data center at record levels, the other businesses within industrial, for instance, whether it's automation, energy, health care, they're all still 20% below their prior peaks. So we feel like there's still room to run in the cycle for those to get back. We think that we're largely through the inventory correction, but we're still now see lots of upside opportunity. And I think that implies across the broader portfolio, where we're at peak in a handful of businesses, but we've still got room to run. Even if you just look at historical trend line, we're still well below the trend line.

And you have a situation where you're not looking for restocking. Inventories are at very lean levels. You're not projecting any. You certainly aren't requiring, you're not depending on any kind of restocking. But doesn't it feel inevitable at some point? I mean, aren't these inventories just 2 years after the shortages that we saw getting kind of lean?

Well, the real question is, do customers have any short-term or even medium-term memory. But I do think one of the interesting drivers now, and I think about ADI, 90% of our parts have lead times less than 13 weeks. So if you're a CFO sitting in a buyer chair, you're not incentivized to go buy and place orders of ADI early or many of our peers because you can get it in insurance business because we were set up.

When I think the change you're talking about happens when you start to see some tightness in supply chains across semi when the buyers will start to get nervous. And they'll be thinking, if I don't have that part, I can't ship my product X, Y or Z, I'm going to start placing orders out further than the 13 weeks or sometimes we're getting orders with-4-week lead times. I think when we start to see lead times extending, that will be when they'll probably start feeling like they have to rebuild some of their buffers. But you -- our view is our customers haven't done that yet. We don't see that. We've watched them lean out inventory actually. And we spent 2 years leaning out the channel from our perspective.

Now given how much we leaned it out and then we hit into this up cycle with growth, we actually -- I think I talked about this last quarter, we dropped below 6 weeks in the channel, right? And we like the 6 weeks model because our teams have done a lot of work operationally to make it so that we essentially match back-end cycle times. So if our back-end cycle times roughly 6 weeks, we want to have 6 weeks in the channel. We dropped a little bit below. So you saw us put a little bit of inventory back in the channel in Q3 and Q4. We're not expecting to put more inventory into the channel. At the midpoint of our guide, we don't expect we'll put more inventory in the channel. We have moved away from the historical sort of 7- to 8-week channel model because we found having the inventory on our balance sheet, especially when things do get tight, if they get tight, have them control and our ability to make decisions and work with customers is better on our balance sheet. So you'll see this dynamic continue where we expect channel inventories will stay lower than historical levels and our balance sheet inventory will be a little bit higher. And we're consciously managing that equation every quarter, every day.

But we feel like we're in a pretty good position. With the up cycle continuing, it's very hard to catch up if you don't have some reserve supply. So we've talked about in the last -- in the last year, we've built more die bank and more finished goods buffers because of the amount of turns business that's coming in and our ability to capture that.

Okay. That's helpful. And then moving to the communications portfolio and data center, you've talked about a lot of strength there, the strength that you saw last year, a very robust position in optical, but also a lot of opportunity in power. So how much have you focused R&D around this opportunity to sort of capture the growth that you've had? And how much can you focus going forward now that it's becoming so much more critical?

So we -- you're absolutely right. We are spending a significant amount of our R&D. Look, I've said this before, our first call on capital is R&D, right? We're spending 16% of our revenue dollars in R&D. And if you think about in the data center, the way I would carve that up just so you get a little perspective, the data center, we said is 2/3 of our comms business, and it's roughly split 50-50 between our power portfolios in our optical portfolio. And then if you look at the pieces there, where we play at the power management level, it's always been a strong area for us. You think about hot swap and some of those features I think that's an area that has lots of growth opportunity, particularly as we move to higher and higher voltages, right? The safety and those capabilities become more and more important.

We've been a very good and had a strong position in the power conversion space. And the area I would have said where we frankly, punched under our weight was probably in power delivery. We are -- and we've talked about we are now shipping in a vertical power solution. And we're seeing that get more and more traction, particularly given all the power constraints. Our vertical power solution has about 30% less power loss than a lateral solution. So it's an effective way to sort of offset some of this power drain. We're not the only ones playing in vertical power, but it is certainly gaining traction as an architecture. So I think that presents us a pretty significant growth opportunity. So we feel like there continue to be areas for us in power to grow.

The other half of the portfolio is optical. And I would say the one thing -- the near-term thing I would highlight there is we have already got our first 1.6 terabit optical module shipping to customers. And our R&D teams back to where are we making investment. R&D teams are already working on the 3.2 solutions. That's the acceleration and speed we're seeing across the data centers that are being built. So we feel like we've got a good position. We're already shipping product at 1.6. We're already developing at 3.2. And over time, I think they both have growth opportunities, just given the sheer scale and the potential power opportunity. That one could be a medium term grow faster, but I think both of those will be good high-growth opportunities for us.

And the margin profile of these data center businesses versus your sort of communications business base station oriented used to be a little bit lower margin than anything else.

At this point, the wireline part of our comms business is an above corporate average margin business for us. So if you think about the overall company margin, industrial and the comms tend to be products that are above the corporate average. Consumer auto tend to be a bit below corporate average, blending out to our corporate model.

Okay. And then wrapping up the end markets, automotive, you talked about -- you did a really good job of helping us navigate the last 9 months where there were some bumps in the road that you saw that not everybody saw. So I really appreciate that.

Aren't we at the point where those inventories are getting too low because automotive, in particular, we saw Nexperia issues that shut people down for a few days and then that got resolved. People have been worried about DDR4 memory. I've been really surprised that we just haven't seen outside of China, any real restocking around those kinds of supply chain things. And I think there's very clear evidence that those inventories are very lean. So shouldn't we be looking at space that's about to improve cyclically?

I would expect -- look, I think there's 2 pieces to it. There's what happens with the unit volumes, right? The current forecasts are for sort of flattish to maybe slightly down SAARs for the full year, right? And I think that will have a significant impact on what the back half of the year looks like. But I do agree that we think the inventories are lean. And I would say what we've seen, and we've talked about how auto has played out over the last couple of quarters, we were pretty confident that we saw early buying behavior across the automakers. Q2, we saw it with the U.S. and Europeans. And in Q3, we saw it with the Chinese. And we expected that we would see some implication of that, some washout or reversal either in Q4 or Q1. We really didn't see Q4 actually came in quite a bit more favorable than we expected, but we -- it does appear we see some of that now because you can see it, we end up with book-to-bill under 1 in auto exiting Q1, which not unexpected given we thought they bought a bunch of inventory in advance.

Now as we work through that, we think the -- there probably is a little bit more in Q2 we might see. But beyond that, I wouldn't expect any more corrective. And if they continue to grow the way they are planning to grow, particularly for us, where China is now 1/3 of our global auto business is in China. And China has been the fastest grower. It's been taking share from Europe and the U.S. As they continue and start to reramp growth, I would expect them to need to get more inventory on their books. So I agree with that sentiment.

And maybe your sense of that market from ADI's perspective. Obviously, China has got a lot of focus on internal development of silicon capability, but you actually bring really unique value-added to markets that are being pioneered in China around EVs and really low-priced ADAS EV type systems. So your confidence in that as an ongoing growth driver despite Chinese domestic competition.

So I think -- look, we've talked a little bit about this. I think our competition actually in China for the most part, continues to be the competition it was before we all started talking about the local Chinese suppliers, right? They are -- the local Chinese is certainly making inroads and doing a lot of great work. But for ADI and if you think about ADI's position in China, we tend not to have a huge presence in the low ASP market, right? We're not in that sell as much silicon at the $0.50 and below. We tend to have a significantly higher ASP, which is tied to us delivering the best solutions, the most innovative solutions to the hardest problems, right, which is why we are at the much higher end.

And you see that in auto, right? High-performance battery management, high-performance communications from a GMSL, A2B, E2B perspective, functionally safe power. So we've invested in all of these trends in auto that are super important. And one of the things, if you look at the China forecast there's still only 10% -- coming out of '25, they're about 10% penetrated in L2+ ADAS. The forecast of '26 are getting upwards of 30% penetration. So the further they penetrate, the more opportunity for us there is from a content perspective. And obviously, if they're taking share from other places that aren't producing at that level, where their EVs are coming out, that gives us additional tailwind.

That's helpful. So maybe moving to some other issues -- question, price increases that you talked about, we've seen raw material prices come up for a while. It seems like you're passing those through. Could you just talk about what you're doing there and what the reaction has been?

Sure. So -- and this is the message our customers have heard. We spent a pretty significant amount of money over the last 3 or 4 years, building out and giving our customers more resiliency, right? We've talked about the expansion of our capabilities internally, the cross qualification of our products. That creates a pretty significant margin headwind because we've been absorbing that cost. At the same time, the input costs continue to increase across our business. We do everything we can to minimize it. Vivek and our operations teams are grinding out efficiencies every day, but it has been a very inflationary environment, and we've been absorbing that for quite a while. And we just felt like the environment was the appropriate time.

Look, we are continuing to deliver more and more value to customers. You can see that in our ASPs. So we felt like it was an opportunity to recapture some of that value. Look, it's -- pricing has always been a dynamic thing at ADI. Prices have increased, prices have decreased. It has been a while since we've done in large scale. But we felt like given the current environment of inflationary pressure, it was the right time to do it.

Helpful. Then gross margins, you've talked about a path to 74%, you're at 71% now with mix kind of going against you. Can you just talk about the puts and takes there?

Sure. So -- sorry. I'll back up a little bit. I lost my train of thought for a minute. So 2 things that we've talked about that drove our gross margins down, right, were mix and underutilization. At this stage, we've continued to grow utilization in the factories, and we think we're at -- pretty close to what we think is an optimal is probably the closest word, an optimal level of utilization. So I don't expect us to see a ton of upside going forward from the utilization part of the equation. However, from a mix perspective, if you remember at peak, we were 53% industrial. We were as low as 44% industrial as we were going through the down cycle. We're still only back at 48%.

So we feel really good that at 48% industrial, we were able to get above 70%. And we continue to expect we'll see some additional accretion. Obviously, in Q2, we talked about there will be some accretion just from the price increase and some of that will stick and recur, but some of that will be onetime. But we do expect we will continue to see additional accretion. And if you think about the way I've described where growth is going to come from, we've talked about industrial and communications growing strong. Those are 2 above margin businesses. So if we continue to see that share shift out of the lower margin -- some -- away from the lower-margin businesses, we would expect to see some pickup there. So I expect primary driver will be mix and mix within the mix, to be honest, even within the businesses and less about utilization, which has been a big factor during the down cycle.

And then also leverage on the operating expense line, you had some variable cost increases last year with compensation stuff and still managed to deliver healthy leverage. How do you feel about that going forward?

So as we've talked about '25, essentially OpEx grew at basically the same rate as revenue, right? Not ideal, but that is a little bit of the mechanics of our variable comp system, right, where we've talked about going from paying very little to paying more normalized variable comp in '25. So we will likely based on the trend line we're on now, we'll pay more variable comp in '26 than we did '25, but it won't be as big of a percentage and a driver. We've also continued to be pretty diligent, although we are investing more because we need to continue to be leading innovation and being first to solutions, we will grow OpEx sort of half of what revenue grows in '26. So we expect we'll continue to see it. And you see it in the guide, we're already guiding to a Q2 operating margin, which obviously is a combination of our expense work and our gross margin work that's up 200 bps.

So a couple of questions on strategy, then I'll open it to the audience. Maxim, you've talked about $1 billion in revenue synergy. That deal was done a while ago, but you're still very focused on extracting the sort of capability of the combined company. Can you give us an update on that?

Sure. When we did the deal, I think the expectation we'd set externally is we would do $1 billion of synergies by the time we got to 2027. A little context, we did tens of millions of dollars of synergies in '24. We did hundreds of millions in '25, and we expect to do several hundred million more in '26 than we did in '25. And we feel like we're on a really good path, and we will get to our $27 billion synergy target, which is really important for those of you who are around for the redo of our financial model in '22, one of the things that we attributed to being able to bend the growth curve was the $1 billion of synergies. So that has been a very significant area of focus for our teams. And I just had my latest update and feel very confident we're on track for '27.

And then thinking about the M&A strategy. I mean, obviously, huge acquisitions in your past with Linear Tech, Maxim, Hittite kind of forming this company. Now it seems like M&A is starting to happen again. Your view on whether there are big transactions to do small transactions to do. Are you more in [indiscernible]?

So from an M&A strategy perspective, I'll start with -- and we just covered this, so I won't state a lot. Capitalizing on the Maxim synergies has been our top priority. We've done a couple of what I would call tuck-in acquisitions, where we've advanced product or gotten teams in areas that are important to us, whether it's in digital or software. We've talked about making organic investment heavily across AI, digital and software. And so we will continue to look for opportunities in those areas. Look, if a large opportunity came along, we'd evaluate, right? We're very fortunate we have a very strong balance sheet. We've got a lot of flexibility. But near term, it is about -- it is really about capturing the synergies.

And then the corollary to that cash return, you've done a pretty good job of returning cash, particularly since those deals were done. How you continue to think about 100% cash return and what's the mix?

Yes. So we do continue to think about 100% cash return. And I would say I feel very good about what we've been able to accomplish given that we make our first call on capital, as you'll hear Vince say all the time is on R&D, and we're spending a pretty substantial chunk of our cash on R&D. But we will continue to return 100%. Our model is 40% to 60% on the dividend. And as you probably all saw, we just increased the dividend for our 22nd year. I think in total, it was about an 11% increase. And the remainder we'll use to retire share count. So if you think about what we've accomplished, I think I talked about on the call, going back to when we did our first repurchases, the amount we've bought back, we feel like that is a really strong position. The other thing that's happened is we've reduced share count by 10% since we did the Maxim acquisition through repurchases. And so we will continue on that model.

Yes. Okay. Let's pause here and see if we have questions from the audience.

Richard, can I take you back to the data center and some of the new areas in power that you were looking at? And I think you called out Vpd in particular. So it sounds like you're moving into second stage, delivering power directly to the GPU substrate. So could you give us a sense for how is that qualifying with customers at this point? And maybe just the sense for how your TAM will grow as you penetrate the second stage?

So yes, on the first part of your statement is correct. We are currently in -- we are actually shipping and generating revenue at a single large customer. We are in conversations with a number of the other players in that space where we expect to continue to make further traction. Obviously, if the architectures change, and I don't know what that TAM looks like because I don't know how much of the existing lateral architecture gets replaced by vertical architecture. But suffice it to say, it gives us a growth opportunity beyond where we've played historically in lateral and which is why we continue to invest heavily in our product there and in our processes to make sure we can deliver it cost effectively because obviously, at that scale, the inevitable outcome will be future price pressure on everybody. So we want to make sure we've got the highest performing product that we can deliver at the best cost, too.

Thank you, [ Lee ]. Any other questions? Maybe I'll just finish following up on that. You've talked about a solutions approach, a module approach to these types of markets. That seems to be increasingly a differentiator, particularly versus your biggest competitor that you have this mindset that you're looking at data center optical data center power as a complete solution. Can you talk about that philosophy a little bit?

Well, I think that Vince has talked about this a couple of years is our ability to move up the stack where we can take advantage of our core analog capabilities, add in software and digital solutions and AI solutions and be able to deliver more complete solutions to the more complex problems is what -- for us is driving a ton of incremental value.

The easiest way to illustrate is, if you look at our products that were released at least 10 years ago versus the products that were released in the last 10 years, the ASPs are up 2x products in the last 10 versus product greater than 10. And some of that is clearly our ability to sell and deliver complicated solutions. And they're powerful because you take where in many places, we would have had somebody buying a bunch of parts and maybe doing the work themselves. They now come to us and say, here's your problem. What's my solution? And we build out a more sophisticated combined solution, we're able to capture a significant amount more value by doing that, which is why we've been so aggressively investing in the software, digital and AI capabilities is to capture that value.

Very helpful. We'll wrap it up there. Richard, thank you so much.

All right. Thanks for having me, everybody. Appreciate it.

Good morning, and welcome to the Analog Devices First Quarter Fiscal Year 2026 Earnings Conference Call, which is being audio webcast via telephone and over the web. I'd like to now introduce your host for today's call, Mr. Jeff Ambrosi, Head of Investor Relations. Sir, the floor is yours.

Thank you, Danny, and good morning, everybody. Thank you for joining our first quarter fiscal 2026 conference call. Joining me today is ADI's CEO and Chair, Vincent Roche; and ADI's CFO, Richard Puccio.

For anyone who missed the release, you can find it at investor.analog.com, along with related financial schedules. 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 will turn the call over to ADI's CEO and Chair, Vincent Roche.

Thank you, Jeff, and a very good morning to you all. Well, we extended our momentum through the first quarter with revenue, profitability and earnings per share, all coming in above the midpoint of our guidance.

Year-over-year growth was broad-based across our end markets with particular strength in industrial and communications, reflecting both cyclical improvement and company-specific execution. This performance underscores the strength of ADI's diversified and resilient business model, enabling us to navigate uncertainty while continuing to capture share in the markets that matter most.

As you've heard me say many times before, the wellspring of ADI's prosperity is built on a culture of relentless innovation and deep customer engagement across the life cycle of our solutions. As such, these activities are always our first call on capital. And now we're investing at record levels.

At the same time, we remain committed to returning 100% of our free cash flow to shareholders over the long term. And I'm pleased to share that we just announced an 11% increase to this year's dividend extending our impressive track record of annual dividend growth and reinforcing our focus on delivering consistent shareholder returns.

Looking ahead, a strong second quarter outlook and improving demand signals reinforced our belief that fiscal '26 has the potential to be a better year for ADI barring unforeseen material changes in the macroeconomic and geopolitical backdrop.

Now as mentioned in previous calls, we're aligning our strategic investments to key mega trends that we believe offer outsized long-term secular growth potential, namely autonomy, proactive health care, sustainable energy transition immersive sensory experience and AI-driven computing and connectivity. And it's in this last area that I will focus the remainder of my comments today.

Over our history, we have prided ourselves on our ability to sense the early signals of emerging trends and to invest aggressively to ensure leadership as those trends proliferate. Artificial intelligence is a good case in point. Our investments targeting solutions for AI's massive performance requirements are generating substantial returns in two distinct parts of ADI our automated test equipment and data center businesses, which collectively make up close to 20% of our revenue.

Now let me begin with Automated Test Equipment, or ATE, Revenue increased approximately 40% in fiscal '25 and further accelerated in the first quarter of '26, fueled by several factors. ADI's ATE portfolio sits at the heart of the most complex semiconductor production test systems for digital SOC, memory, RF and millimeter wave and power devices as well as system-level products. We deliver the integrated pin electronics, device power supplies and parametric measurement units that drive sense and precisely characterize every pin and rail on complex ICs under the most demanding real-world conditions.

Our application-specific solutions are complemented by a suite of analog RF and power products, enabling complete high-density test subsystems. These solutions enable customers to increase platform channel density and throughput to validate the most advanced nodes and packaging technologies faster and more thoroughly at lower costs, with up to 30% less energy consumption per system. As a result, we enjoy industry leadership across the major test platforms and our content per tester stretches into the tens of thousands of dollars.

Importantly, we've earned a durable role as the leading-edge technology partner in the fast-evolving ATE market which continues to grow with rising semiconductor complexity and the proliferation of connected intelligent devices.

Now let me turn to our data center business, which grew approximately 50% in fiscal '25 and also saw accelerated growth in the most recent quarter. Several factors are driving this expansion.

AI's demand for faster processing speeds and greater power density, combined with the monumental increase in data volume is creating exponentially greater complexity in data centers. This, in turn, drives the need for faster innovation cycles and new architectures. And ADI's analog and mixed signal, power and optical portfolios are critical to this evolution.

I'll talk a bit now about power management, which is increasingly a system-level differentiator in AI data centers.

At a high level, it breaks down into power delivery and power control. Think of power delivery as the vascular system moving energy across the data center. As customers migrate to higher-voltage architectures, safely moving larger amounts of power becomes foundational Protection is nonnegotiable as the consequences of falls right sharply for both uptime and safety.

ADI's hot swap and high-performance protection solutions which represent roughly 1/3 of our data center power revenue today, enable predictable fault isolation, fast recovery and life maintenance, allowing [ racks ] to run continuously even as power levels increase.

Beyond protection, architectural change is also expanding our role in power delivery. We continue to see strong growth in point-of-load converters, micro modules and high-performance regulators, new approaches such as vertical power and higher voltage distribution, are now opening incremental [ SAM ] for ADI. We shipped our smart power stage to our first vertical power customer last quarter, and adoption of our intermediate bus converter modules is accelerating for 48- and 54-volt architectures.

Now let's think of power control as the brain of the data center energy system. AI performance per watt depends on how precisely power is regulated and converted at the GPU or CPU. Roughly 1/3 of our data center power revenue comes from DC Power Control, including our power system management ICs and multiphase controllers. AI accelerators demand fast, highly efficient, digitally controlled power conversion from the rack down to tightly regulated core voltages.

ADI's analog and mixed signal solutions abilities to enable higher compute density and better system-level performance are driving increasing demand and design wins.

To sum up our AI data center power story, ADI enables customers to move cars safely, regulated intelligently and scale AI infrastructure for the future. As power becomes a strategic constraint in AI data centers, our suite of high-performance technologies and system-level approach position us well for the next wave of infrastructure growth.

Finally, turning to our optical connectivity portfolio. As AI continues to scale, the amount of data that must move within and between data centers is increasing exponentially, to deliver AI class bandwidth and latency, industry leaders are rearchitecting their networks, increasingly replacing traditional electrical switching with Optical Circuit Switches or OCS. In this environment, performance is no longer defined solely by the optical modem system. It increasingly depends on the precision control monitoring and power solutions, the nervous system, if you will, around the laser, DSP and photodiode signal chain.

By tightly integrating precision control, temperature regulation, real-time monitoring and compact high-performance power management, ADI allows optical systems to operate at higher speeds with lower power and in smaller form factors. This enables data center operators and carriers to increase front panel bandwidth density, reduce power consumption and cost per bit and accelerate to the market.

As AI workloads continue to drive faster upgrade cycles and new network architectures. Our ability to help our customers manage optical complexity, performance and economics positions us well to benefit from AI-driven infrastructure investment in the future.

So in closing, it's important to remember that AI is just a part of our larger growth story. Our diverse business model is enabling profitable growth across numerous trends, markets and applications. And as a result, we've never been more optimistic about our future at the intelligent edge.

And with that, I'll pass it over to Rich.

Thank you, Vince, and let me add my welcome to our first quarter earnings call. Revenue in the first quarter came in towards the higher end of our outlook at $3.16 billion, growing 3% sequentially and 30% year-over-year. Industrial represented 47% of our first quarter revenue, finishing up 5% sequentially and 38% year-over-year. Strength was broad-based with all segments delivering growth of 25% or more on a year-over-year basis including record quarters for ATE and aerospace and defense.

Automotive represented 25% of revenue, finishing down 8% sequentially and up 8% year-over-year. We saw continued year-over-year growth for our leading connectivity and functionally safe power portfolios driven by our strong position in [ Level 2+ ] ADAS systems.

Communications represented 15% of revenue, finishing up 20% sequentially and 63% year-over-year. Accelerating year-over-year growth was led by our data center business as increasing investments in AI infrastructure continue to drive robust demand for our optical and power portfolios.

Wireless also recorded accelerated growth driven by cyclical improvements and has now grown double digits for 3 consecutive quarters.

And lastly, consumer represented 13% of quarterly revenue, finishing up 2% sequentially and 27% year-over-year. The year-over-year growth was due to an upside across all consumer applications with notable benefits from content and share gains in the fast-growing wearables market and in premium handsets.

Now on to the rest of the P&L. First quarter gross margin was 71.2%, up 140 basis points sequentially and 240 basis points year-over-year, driven by higher utilization, favorable mix and roughly 50 basis points from discrete items, which were not included in our original forecast. OpEx in the quarter was $812 million, resulting in an operating margin of 45.5%, above the high end of our guidance, up 200 basis points sequentially and 500 basis points year-over-year. Nonoperating expenses were $53 million and the tax rate for the quarter was 12.7%, [ all told ], EPS was $2.46, up 9% sequentially and 51% 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 $4 billion, and our net leverage ratio decreased to 0.8. Inventory increased $111 million sequentially with days of inventory finishing at $171. Channel inventory increased ending within our 6- to 7-week range. We are continuing to build [ Di Bank ] and finished good buffers to help support the upside we are seeing while balancing a strategically leaner channel position.

Over the trailing 12 months, operating cash flow and CapEx were $5.1 billion and $0.5 billion, respectively. We continue to expect fiscal 2026 CapEx to be within our long-term model of 4% to 6% of revenue. Free cash flow over the trailing 12 months was $4.6 billion or 39% of revenue.

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. To that end, since the inception of our capital return program in 2004, we have returned more than $32 billion to shareholders via dividends and share repurchases. And since our Maxim acquisition in 2021, we have returned more than 100% of free cash flow to our shareholders. And as Vince mentioned, yesterday, we announced our 22nd consecutive annual dividend increase raising the quarterly amount by 11% to $1.10.

Now moving on to our second quarter outlook. Revenue is expected to be $3.5 billion, plus or minus $100 million. Operating margin at the midpoint is expected to be 47.5%, plus or minus 100 basis points. Our tax rate is expected to be between 11% and 13% and based on these inputs, adjusted EPS is expected to be $2.88 plus or minus $0.15.

In closing, our strong first quarter performance and favorable second quarter outlook underscores ADI's disciplined execution and the growing momentum we are seeing with customers across our end markets. While the macro backdrop remains fluid, demand indicators continue to trend favorably, and I believe we are well positioned to continue capitalizing on the opportunities ahead.

With that, I'll give it back to Jeff for Q&A.

Thank you, Rich. Now let's get to our Q&A session. We ask that you limit yourself to one question in order to allow for additional participants on the call this morning. If you have a follow-up, please requeue and we will take your questions if time allows.

With that, operator, we will have our first question, please.

[Operator Instructions] Our first question comes from Jim Schneider with Goldman Sachs.

Good job on the results. I'm curious as you look forward over the next quarter or 2, whether you expect to continue to see above seasonal performance in the Industrial segment in particular? And can you maybe also discuss are you seeing any kind of signs of OEM customer restocking at this stage or not yet?

Sure, Jim. Thanks for the question. So obviously, Q2 was our strongest sequentially -- strongest sequential quarter, normally up in the mid-single digits, 4% or 5%, and our outlook, which embeds sell-in equal the sell-through reflects about an 11% sequential growth applying obviously significantly above seasonal growth.

By end market, as we look out for Q2, what we expect to see is industrial continuing strong, up 20% sequentially and well above seasonal at 50% year-over-year, clearly being aided by the cyclical recovery and our strength in ATE and ADAS. We expect comps to be up high single digits sequentially, above seasonal and about 60% year-over-year. Again, as we talked about now, the AI surge for data center and the wireless cyclical recovery of both driving.

From an auto perspective, we do expect that to be flat to down sequentially, a bit below seasonal, and this is, as we've talked about, largely due to the tariff and macro pull-in unwind that we've been talking about since the second and third quarters of last year. And then consumer in Q2, we expect to be down mid-single digits, in line with seasonality. And then obviously, we don't guide out to the third quarter, but I'll remind everybody that our third quarter is typically up low single digits.

Yes. I think, Jim, one other comment you asked is a little bit any evidence of restocking. We don't see any evidence whatsoever of that at this point in the cycle.

Thank you, SP1 Our next question comes from Stacy Rasgon with Bernstein Research.

I was wondering if you could give us some color on gross margin and OpEx drivers embedded in the guide. I know OpEx, I presume is up on variable comp gross margin, I assume mix and utilization. And just any color you can give us on those drivers within the model would be helpful.

Stacy. I'll start. I'll go through the [ GM ] question first. So obviously, as you saw in the post, Q1's gross margin was 71.2%. This was higher than expected on better mix, stronger utilization and then a few items that we did not forecast.

During Q1, we've gotten closer to our optimal utilization level. So as we look out, we expect only to see modest upside from utilization. And in our Q2 outlook, we're assuming 100 bps of gross margin expansion or up essentially 150 bps versus Q1 because that excludes the discrete items that I mentioned in my prepared remarks, and again, the expected increase here is driven by favorable mix and uplift from price, which includes 50 bps that will not repeat in Q3 since it relates to the onetime effect of repricing our inventory in the channel. So you will expect us not to see that same 50 bps recur.

On the operating margin side, for us, Q1 was roughly in line with expectations. The beat at the operating margin line was driven mostly by the stronger gross margin we just talked about.

In Q2, I see OpEx growing in the mid-single-digit range. Obviously, we have no shutdown in the second quarter. We're continuing to hire in strategic investment areas. We've got a higher bonus factor. We've got our GTC conference, but we will see OpEx as a percent of revenue fall. And with the expected growth in gross margin, we see about 200 basis points of sequential improvement in Q2. So [ 475 ] at the midpoint. And for the full year, we continue to expect OpEx growth to trail revenue growth by roughly half. One of the -- sorry, Stacy, one last point.

Just to clarify on the gross margins, on a reported basis, up 100 bps and excluding the 50 bps of onetime, it would be up $150 on a normalized basis. That's what you said?

Yes, correct, Stacy.

I just wanted to make sure I had that.

Yes. The highlight is -- no, it's okay, Stacy. We obviously have been talking about seeing increased leverage this year. part which is the large reset on the variable comp headwind we spoke about last year. And obviously, we're seeing that leverage play out.

Our next question comes from Harlan Sur with JPMorgan.

Congratulations on the strong quarterly execution. Within your AI business connectivity, power, ATE, that was a great overview, Vince, of the differentiation in your prepared remarks. You articulated a strong portfolio of RF mixed signal, power products and performance differentiation. But the Analog team has always further differentiated on systems-level integration, software digital signal processing. So how are you leveraging your software, DSP and systems capabilities to gain further traction in this very fast-growing end market?

Yes. Thanks, Harlan. Good question. Well, I'd say, first and foremost, if you look at ADI's trajectory over the last 5 to 10 years, we've been approaching our innovation activities centered around application system knowledge. And that's enabled us to capture more of the customers' complexity, boil it down, increase our ASPs.

So I think what we see in certainly the power side of things is a mix of all the technologies. In the last -- up to kind of the last 3 or 4 years, most of the power business was about the Analog circuits that configured the power systems. But tomorrow systems are going to be more and more digitally controlled, if you like. So that's where a lot of our digital signal processing heritage will come increasingly into play in these multiphase, very, very high-speed conversion systems where precision is critically important and being able to manage more and more rails of power. So that is a very, very good use an example of where our digital heritage comes into play with the with the mixed signal as well as the power technologies.

In the optical sector, around the optical mode and the nervous system, as we call it, again, that's a mix of a lot of digital functionality that partners with our mixed signal conversion systems as well as the power. So everything we do these days has a strong mix of analog, increasingly digital and increasingly software. And even -- you may have seen, I think on the last earnings call, we talked about a couple of product platforms that we have brought to market in the fourth quarter that had machine learning embedded in them as well.

Our next question comes from Vivek Arya with Bank of America Securities.

I was hoping you could quantify your data center exposure across ATE, optical and power. What's that exposure right now? How much did it grow last year? And then what is the right way to kind of model growth for that segment going forward? And part of that, power is a high-growth segment, but it tends to be very crowded. So I'm curious what's your visibility around keeping or extending your market share in that segment?

Maybe I'll start with the last piece. Yes, look, the Drive in an environment of incredibly hard problems. And the problems in the power system are becoming increasingly difficult in both scope and form, so that is the sweet spot for ADI.

And we're able to approach the solution of these problems at the system level by virtue of the knowledge that we have in the area of thermodynamics, for example, electromagnetics, coupled with our circuit magic and all the mixed signal and single processing technology that will go around those things.

So I think the problems are becoming more and more difficult. And in fact, there is a norm in the high-performance computing world that ultimately computing performance equals availability of power. And that power has got to be delivered with increasing efficiency, in tighter and tighter spaces. So we feel good about the possibility of differentiating for the long term there.

What was the growth stuff [indiscernible]...

The breakdown between ATE data center and then within -- yes, so Vivek, if you think about our data center business, Vince commented on the call, is roughly 20% of total ADI now. It's over a $2 billion run rate and to think about the breakdown there. About 40% of that ATE the rest is data center. And then within data center, it's pretty balanced between power and optical.

And historical and any forward kind of looking growth objectives, if you have them?

Well, I think it's safe to say that these areas will all grow at double digits over the next several years.

Our next question comes from Timothy Arcuri with UBS.

You have been thinking that you're shipping about 10% to 12% below consumption. Where do you see that in the guidance for April? And then do you think by the end of the year, if you're sort of seasonal plus through the fiscal year, will you be shipping to consumption by the end of the year?

Thanks, Tim. I'll take that one. So as we've talked about, if you look at that longer-term trend line where we've been shipping well under in '24 and '25, our sense now is customers are through that digestion phase and are essentially ordering to consumption. And we think that's broadly true across the end markets, but there's probably some differences across the diversified customer and application base.

And obviously, for everybody who we don't talk always about this, when we talk about consumption, we're talking about that long-term linear trend line for shipments. But we do expect that we are nearing customers ordering at consumption across the board. And I think Vince mentioned earlier, we have not seen evidence yet that there's been restocking activity across our portfolio.

Our next question comes from Joshua Buchalter with TD Cowen. .

Congrats on another set of strong results and guidance. In response to an earlier question, you mentioned industrial is growing because of the cyclical global recovery, but I guess you've been very clear that you're not seeing evidence of restocking.

Any help you can give us on where you're seeing the biggest signs of demand recovery because the outlook does seem well better than most of your peers. And how much of the video syncratic growth drivers? And any help you can give us on how much industrial is growing ex ATE in the near term?

All right. Thanks for that question, Josh. So I'll just do a little bit of a level set since we called the bottom industrial, obviously, our most profitable business has grown sequentially every quarter. And in Q1, actually, our book-to-bill was well above 1. And that does exclude any impact from pricing. So we feel very good about where we are landing from an orders perspective on the industrial.

For 4 straight quarters, we've been an above seasonal growth with double-digit year-over-year growth, and that is driven by strength across all of the industrial segments. And I think that's part of what is indicative of the cyclical momentum we've been highlighting. Adding to that is our strength in ATE and Aerospace and Defense, which as we've talked about, is about 1/3 of our industrial, each of which are continuing to achieve new highs. And given that momentum in bookings and backlog, we don't see this trend stopping.

As for the other 2/3 of industrial, we're still 20% below previous peaks. So we've got plenty of room to go as the cyclical momentum continues, evidenced by improving PMIs, positive book-to-bill across all industrial sectors and all geographies.

And embedded in our outlook for Industrial is, as we said, to lead our growth still up 20% plus. And we expect all of our segments to increase led by ATE, which is growing greater than 30% sequentially. And so very broad-based. And I'll highlight one other point that we've been talking about, and this is one of the pieces of evidence we look for in the cyclical piece that we continue to see growth in the broad market industrial. We're now seeing normalized ordering patterns for an up cycle in the broad-based industrial market.

Our next question comes from Tom O'Malley with Barclays.

This is Nat Penn on for Tom O'Malley. Just curious if you're seeing any particular strength or weakness from a regional perspective?

Yes. So geographically, we -- in Q1, we saw a broad-based strength. We had double-digit year-over-year growth in Asia, Americas and in Europe. When we look at it on a sequential basis, we saw strength in Asia and Europe, while Americas were down from typical buying -- customer buying behavior in consumer and the weaker auto demand.

Our next question comes from Joe Moore with Morgan Stanley.

You talked about the reasons for auto remaining a little bit softer. Any signs there of stabilization or potential growth as you move past this subsidy environment?

Sure. I'll give a little bit of context in what we think we're seeing and what we've got baked into our guide.

Obviously, this has been a really strong growth market for us. We've been growing double digits through the cycle. Particularly as we've gained content and share particularly in our connectivity and power for the ADAS systems. And as we've talked about in the past, we've had a notable share gain in China, which is taking largely taking light vehicle share from other regions. So it drove a record [ 25 ].

So now you look near term, you said in the prior call that we were approaching Q1 with some caution, as we had flagged some unusual behavior related to tariffs, where we thought we saw some order acceleration. We suspect that it will be a headwind in Q1 and feel that it's probably what happened here. While we managed to grow 8% year-over-year, Q1 was well below seasonal and our book-to-bill did end under one. So given the softer bookings we saw and the fact that we now have greater exposure to China than ever, which is typically light in Q2 due to the Chinese New Year, our expectation is that auto will be below seasonally Q2 or flat versus our typical seasonality of plus mid-single digits.

Now what's important to note is nothing has changed with respect to our strong share position and underlying content growth. Therefore, we're pretty confident that once we get past the headwinds in the first half, our second half will be stronger and I actually believe that auto will grow in fiscal '26 versus what was a record fiscal '25.

Our next question comes from Ross Seymore with Deutsche Bank.

I just wanted to dive back into the industrial side. guiding up 20%, I can't remember you guys ever unless it was a maximum or linear quarter, guiding that business up. So how much of that is ASPs? And how much of it is secular and how much is cyclical? Any sort of breakdown on that would be helpful.

Yes, maybe I'll kind of break down the growth. So 20% plus, obviously, a very strong sequential growth, Ross. We're not going to break out price by end market, but as we commented on, there is some lift there from price. But importantly, I think what Rich said was if you exclude any pricing impact, our book-to-bill in Industrial was well above 1, and that included strength across regions and across applications. So everything is driving growth for us really in our industrial market.

And then as far as what's cyclical and what secular if you just take our ATE and Aerospace and Defense business, that's roughly 1/3 of industrial. And as Rich talked about, that those are continuing to drive new highs, pretty clear end demand drivers in those markets. And then while there's probably more secular tailwinds in the other parts of industrial. But right now, kind of where those are relative to their past peaks. You can kind of call that cyclical, but there's certainly content gains elsewhere if you think about automation and energy and health care, there's definitely secular trends there as well.

I think it's worth noting that none of this has happened by accident. Industrial has always really been when we think about the sectors within ATE, aerospace and defense, health care and so on, instrumentation.

These are very, very core parts of the identity of ADI, and we've been investing. We've been bringing new strengths of innovation to that business now for several years, and we're seeing the benefit of that, particularly right now in the ATE as well as the aerospace and defense area.

So -- but as Jeff and Rich have unpacked the story for you, price resiliency is also very, very strong in this business. The life cycles are long. So overall, we've got stability with some very, very good tailwinds driving the industrial business ahead.

Thank you. We'll move to our last caller, please.

Our final question comes from Chris Caso with Wolfe Research.

I just wanted to ask a bit more on your comments on pricing and understand that some of that pricing benefit is onetime because of what's going on in the channel. But perhaps you could speak more broadly on what you're seeing with pricing where you'd expect your blended pricing to be for the year? And what -- how much of this is coming down to what the customers are actually paying?

Yes. Well, Chris, thank you for the question. The first thing I'll say is that really not much has changed in our approach to pricing. As a company, we've always been dynamically adjusting the prices of the portfolio really to reflect the value of the solutions that we deliver over the life cycle, the entire life cycle of our products. So I think our ability and our track record of delivering the highest level of system performance in the analog space. And ultimately, the total cost of ownership benefits to our customers has always enabled ADI to attract a premium, an innovation premium. And that premium actually is extending.

And over the last few years, as you know, we've committed quite a bit of capital to augment the supply side of our value proposition, the support side and giving our customers greater optionality from a regional and geographic perspective, but at the same time, we have, like everybody else, we've been facing persistent inflation. And what we've done in terms of this latest tranche of price increase, was really just a practical response to the inflationary environment. So I think that's the way to think about it. We -- there is a dynamic ongoing element to what we do and a response to the current economic environment. Rich, do you want to say anything out some of this or Jeff?

Yes. So obviously, you've heard us talk about the pricing adjustments that we made with our channel partners that went into effect at the start I would add a couple of things. We are also largely through our annual negotiation with our direct customers. So our Q2 results should reflect the full scope of our recent pricing actions.

And the way to think about it, just to help you guys out here, the overall impact of the pricing actions on our 2Q outlook is about 1/3 of the quarter-over-quarter revenue increase at the midpoint is related to price. Excluding the pricing uplift, our sequential growth outlook is more like 7% versus the 11% I mentioned before, still nicely above our 4% to 5% seasonality.

And importantly, as I mentioned, roughly half of the price lift relates to repricing of channel inventory, which will not repeat in Q3. The other thing I would just to help you out as you think going forward, I think that we would expect about 50 bps of incremental growth in each of Q3 and Q4 related to price. So it's -- over the full period, it's not a huge number, but that's the right kind of sizing, right?

All right. Thanks, everyone, for joining us today. 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, investor.analog.com. And thank you for your continued interest in Analog Devices.

This concludes today's Analog Devices conference call. You may now disconnect.

All right. We're going to get started. I'm Tim Arcuri. I'm the semi and semi equipment analyst here at UBS. I'm very pleased to have Rich Puccio with ADI, Rich is the CFO. So thank you, Rich. Thank you.

Thanks for having me. Appreciate it.

So Rich, let's just start with the question that I and you are probably getting in every meeting, which is you just had a very strong earnings report. You were one of the few to guide above seasonal last week for your January quarter. Can you speak to what you're seeing in the business? And some of the key segments and what's allowing you to outperform your peers?

Sure. So maybe I'll take back a little bit. If you go back to Q2 '24 when we said, hey, we think we've hit the bottom here. We're largely through our inventory correction. We expect that we'd start to see sequential growth in the back half of our '24. We see more growth in '25, and we were expecting we'd see a more significant acceleration in the back half. And in fact, that is exactly what has played out for us. And for us, what we're seeing, and I think this is really important is we've seen a broad -- really broad-based recovery, if you think of where we were at the trough and where we got back to this year. So if you all take them by the end markets and give you a little bit of the description, I think about the industrial market, we've been talking about for better than a year, green shoots where we were seeing things in our industrial, right? And what we were seeing was green shoots in aerospace and defense and in our test business. okay? And as the year progressed, we started to see growth in some of the businesses that probably were still having some inventory correction.

So automation, a big part of our industrial business. I talked about this a couple of quarters in '24 where it was actually a laggard and hadn't started to see any real rebound and then started to rebound. So we've now had three straight quarters of growth in automation. And by the time we get to the end of the year, we are -- we have growth across all of those submarkets within Industrial. We exited Q4 with a book-to-bill above one industrial, which also helps explain what we're seeing for the above-seasonal guide in Q1 in our industrial. And that strength, we expect to see that continue. Given the position we are and particularly as you look at the tailwind line, even the two I just talked about in the test business, the AI capital boom is happening, and we are benefiting pretty significantly in the test space because the more SoC, the more high bandwidth memory, more tests for us.

And given our share there and our products, we feel like that's a really strong position for us. On the aerospace and defense side, the world isn't getting any more civil and there's quite a bit of increased defense spending globally. So we think that given that with our position in aerospace and defense, really feel good about that. The other piece has been a really strong grower for us is you go to our communications business. 2/3 of that communications business is wireline basically our data center business. And that is an area where we've seen tremendous growth because also because of this AI infrastructure boom. And if you think about that portfolio, that's sort of split between our optical products and our power products. And if you think about the way that growth is happening, we feel like we're really well positioned with our product portfolio already in the data centers and then some of the newer products that we've had designed into the data centers. So feel really good about that.

In fact, we've talked about the size of those two businesses. I think the -- we've talked about the test business is an $800 million kind of business coming out of year-end. The aerospace and defense is eclipse the $1 billion business in the year-end, and we continue to see that growth tailwind behind this going into the next year. On the consumer side, consumer has been very strong. It was one of our highest growth rate areas for all of '25. And that is largely attributable to the design in and the new sockets we've gotten. It's a much more -- if you think about post some of the wireless things that were going on. You think about the breadth of our consumer portfolio.

Now it's not just handsets, it's handsets, it's hearables, it's wearables, it's gaming. And we've seen that growth happen throughout the year. Now we will expect in Q1 a seasonal decline, obviously, on the consumer side. But if you look broadly across the business, we feel like we're really well positioned from a technology perspective, from a customer relationship perspective. And then if you look at the cyclical piece of it, particularly on the industrial side, we've been running very lean in the channel. As a matter of fact, we were very early on in managing down inventories in the channel. I think we undershipped our channel for 2 years. In fact, this quarter was the first time in 2 years that we actually shipped into the channel to get ourselves back up to a sort of 6-week level in the channel. So I feel like the cyclical pieces are in place. And the other thing is we're seeing more of the broad mass market stuff come back in industrial, which is also another good cyclical indicator for us.

Yes. I guess if I aggregate the AT business, aerospace and defense as well as data center, it seems like those in aggregate contribute something like incrementally $200 million year-over-year. That's very unique to you. Is that fair?

Yes. And I think it is fair, and I think what has differentiated us and those are two areas that require really high performance chips. And so you think about in the test space, as we've described, you got to be able to test the most complicated things, which means you have to have the most sophisticated technology been a leader there. We have an incredible share there. That is a real ADI, idiosyncratic thing. Then if you go look at aerospace and defense, that's one of those areas. It's a perfect example for ADI of us working up the stack, right? If you think about what we're delivering in that space is more and more much higher ASP modules and solutions.

And so that is a big driver for growth for us. And obviously, we've got that tailwind I mentioned as defense spending continues to increase. And our teams continue to innovate there. And that's one that captures a bunch of our different products, and we get much more value when it's a system solution. And I think that's broadly -- and I can talk about this probably in any one of our end markets. It's our ability to innovate and be there first with the hardest solutions that is separating us out from a lot of our competition.

Great. Let's talk about China and geopolitics. So fiscal '25 just closed. Your China business was up -- sorry, China was 26% of revenue. Your China business was up 26%. And in a year where your total revenue was up 17%. So China actually outgrew your total revenue. yet we hear the drumbeat of local displacement getting louder and louder, especially in autos. Can you talk about that? Are you -- I mean, obviously, you see some of that, you do fly above some of what's getting displaced. But can you just talk about China?

Yes. So look, China was one of the first businesses into the decline and it was one of the first ones to come out for us. It has been a fantastic year, another record year revenue-wise for us in China. And then even within that, we've had our second record year in China auto. And that aligns very well correlates with what we've seen and where new vehicle production has been happening. And when you get all that incremental -- excuse me, vehicle production in China and you add on top of that, our share gain and our content gains that are coming through, that's a really, really powerful growth story for us. The interesting thing is we've done that and set that high level of growth.

And outside of auto, the rest of the end markets in China are still significantly below their prior peaks. So we feel knowing that, knowing that we've had significant design in growth and double-digit design in growth again this year. We actually feel like the medium and long-term growth will continue for us in China. And look, it continues to be an area just like everywhere else where ADI competes, if companies need products, they still need ADI's products. So they still come to us for their most complicated solutions help us take out some of the complexity. And when we can do that, they become very sticky sockets, and we are able to hold on to those.

We're also able to capture higher value because we are there with the most important technologies and you look across the franchises, we see that in all of them. Do we all worry? I worry, we all worry about the digitization, sure. I think we've been worried about that for many years. You hit it right. We don't have a huge portion of our business in that low volume -- excuse me, low value, high-volume part of that market, which is I think where the local competition has come first. we tend to play at a higher end. Our ASPs are -- tend to be 4x the average at a global level and it's probably pretty consistent there. So that is a strong position for us. And also they'll continue to get better, but it's going to take them a while to get to where they can replace the high-performance stuff because of for us, it's 60 years of experience designing in the Analog world that separates us out from that competition.

Are we hypervigilant about it? Of course. And what really matters, as I said this port matters in China, it matters everywhere else is being there first with the most -- in the most complex areas and capturing that innovation premium, which is why you see in our numbers we just published, record amount spent on R&D, a record percent of our revenue spent on R&D, I think, and we continue to hire engineering talent to make sure we are there as the innovation leader.

So of the outgrowth in China, would you say was it driven by any one market? Was it driven more by autos?

For us, certainly, auto, given that it's had its second record year, our China auto is actually now about 1/3 of our I guess, 30% of our global auto business. So it has grown very strongly. And part of that, if you think about what's happened in the China auto market is they are pushing down some of these complex ADAS Level 2 plus ADAS and the immersive cabin experiences, down into even lower and lower priced vehicles. So you think about in the U.S., some of those features you don't see in a moderately priced car. You see those in China.

So that's a real benefit for us because those are places where we lead. And it's -- we talk about but it's GMSL. It's functionally safe power. It's the connectivity, whether it's AB2B or A2B. So those are things where we've gained share and continue to have the best products. And I think that's helped drive that outside China auto growth. Also, most of the incremental vehicles produced last year were produced in China. And so that's actually is good for us.

Yes. Can we talk about the maximum revenue synergies? I think you said a few $100 million for fiscal '25. I think Vincent on the call said he thinks you can get to the $1 billion target even earlier than 27 actually or at least by 27, if not earlier. Does this mean like we could be exiting calendar 26 annualizing $1 billion in synergies?

So, good memory, and we set the target at the Investor Day. The [indiscernible] wasn't there. We set the target at Investor Day that we'd get $1 billion of synergies out of the Maxim acquisition by $27 million. You are right, hundreds of millions is what we've seen in the current year. And when we look at the conversion of the pipeline and what we still have in the pipeline and you model it out, it looks -- we are ahead of where we thought we'd be at this point.

Could we exit '26 there? Possibly. But we don't -- I don't have the kind of visibility still. This is good and bad, right? Our lead times on our -- most of our products are still inside of 13 weeks. So we don't get a ton of fill in the out quarters, which is why we don't guide out past the next quarter. So I don't know if it will all convert and get us $1.26 billion. But certainly, we feel very confident that in 2017, we will have $1 billion at least $1 billion of revenue synergies.

And can you give an example of that, how do you -- well, just give an example of something that you know as a revenue synergy. So when you're like measuring that number, how you...

It's a great question. A very good example is GMSL, right? That is a product where the cross-sell opportunity and our expanded efforts to sell that product as a result of an unbelievable revenue growth from a GMSL perspective. We've talked about how big that TMSL business is and the continued growth there. Another place -- another example of that would be matching up the maximum low power with the ADI vital signs monitoring. And so you'll see products that are coming out in the hearables and wearables space that do vital sign monitoring. That's a synergy.

The vertical power is a result of synergies across the businesses. And then there's one more, Jeff. I was using an example data center, sorry, in the conversion -- power conversion. So those are 4 good examples of things that are easy to understand the combination of the Maxim and ADI businesses from a synergy perspective.

Got it. On the call, you also talked about pricing. It sounds like this is actually quite strong, especially for the new products. Can you talk about this? Are you using strategies to push customers? I know some of your peers are increasing pricing on the old stuff to sort of push them under the new stuff. But can you talk about what's actually happening for you where pricing on the new stuff is strong.

Yes. So certainly, if you look at our -- and we tend to categorize it sort of the 10 and newer -- 10 years and newer and 10 years and older. And certainly, if you look at the 10 or even if you look at the ASPs on the products in those categories have continued to increase because we continue to add more features, functionality, solve more complicated solutions. And if you think about the life cycle and how things turn somewhere like industrial, it may take a little bit longer because the products tend to be stickier and last longer. But as companies move and migrate to the more advanced technologies, we expect for the foreseeable future, we'll continue to see that blended average ASPs increase because some of those markets will move even faster given the consumer and auto life cycles are shortening pretty dramatically.

Auto is moving in some areas, some of the auto features are moving closer to more consumer-like features from the speed of development. So we'll continue to see that. If you step back and look at it in aggregate, we've talked about pricing for us being relatively stable post 2 years in '22 and '23 with pretty significant pricing increases. We have been very disciplined on not giving that back. And I think that's a little bit of what Vince was mentioning is we've -- we feel like we're delivering a premium value. And the other piece of it is there's nothing that -- basically nothing in the supply chain in semiconductors. It isn't inflationary.

So to be able to continue to keep our margin, we got to be really strong with our pricing, and I think the teams have done excellent job in that space for us. So I do think that's a good story. If you think about our -- you go back to the Investor Day and we said, hey, this is how we're going to help step up our long-term growth rate is by not giving back -- and we've seen this. Some of our competitors have come out publicly and said, hey, we're going to go back to giving out 2%, 3%, 4% price reductions every year. That is not the way we're doing it. So we've been very, very disciplined in how we use price.

But to your question about pushing people off, look, we've historically on the vintage products had some price increases because the newer products come out and they have better features and functionality, but it's complicated to change and some folks don't want to. We don't force them to. You might have to pay a little more to keep your vintage product, but we don't -- we're not trying to push them off. And lots to change. But based on the sentiment charge we've all seen for how long some of our products last in the market, plenty of them are happy to hang on. begins, just think about context-wise, often talking about dollar part in a $1 million machine, he's a lot of work to design that out and put a new one in. So that's why that's so sticky for us.

And if I take your January guidance, and I just apply normal seasonal throughout the rest of calendar '26 or throughout all the calendar '26, I get you growing somewhere in the range of 20%. I mean, it's much higher than what I think the consensus would be that the Analog market will grow. I'm actually a little more optimistic than most people on what Analog grows next year. But do you have a sense -- I mean, you talked about what's driving your outperformance. But do you have a sense of what the market will grow next year? You're not saying that you're going to guide 20%, but that your supplying normal seasonal, but you're obviously going to outgrow the market. Do you have a sense of like how much you alter the market next year?

That's a great question. I mean, look, if you in your model if we were to take that seasonal model and then you look at the -- we've talked about this a bunch, actually, we've talked about it on what that sort of consumption line would be for the industry, say that over time, that's something plus or minus CAGR kind of number, even at the number you described, we're going to be well better than double what the market might grow. And I think that is what I would attribute that to. I'm not saying that's what we will do. But in that scenario, what backs that up is we're aligned really well to a bunch of the big macro drivers, and we've got those idiosyncratic growth areas, right?

You think about what's going on in our auto record years in some of our sub-businesses given where we play in the infotainment and ADAS, the test business, aerospace and defense business, the consumer expansion. Even in -- like I said, even in the wireless, we're seeing growth. So I think there's a number of these areas that will continue to support that growth. And we go back and look in the places we're competing, and we can see we're gaining some share. And we're also seeing strength in our pricing. So I think that's a big part of the formula for us to outgrow the market.

And can we talk about data center it's not necessarily unique to you, but relative to your size, it does seem like your data center exposure is a bit bigger than some of your peers. And I -- and I want you to kind of double-click on that. I know you have the electrical the electro optical interfaces and then just generally in the rack. I mean, if that grows another 50% 5% of growth, that's a huge, huge piece to grow. So can you just talk about that?

Yes. So if you think about the data center for us, our exposure there is pretty much evenly split between the optical and the power pieces. And if you think about -- for us, for the optical, we've got a very strong business in the existing sort of $400 optical controllers. We've got the design in that we've talked about at 1.6 terabyte and we're actually already building on working on the engineering forward 3.2 because the speeds just continue to increase the pressure from these AI data centers to move things across at higher speeds is incredibly intense. Then you go below that and you look at the other half of that portfolio is on the power side, right?

So it's dealing with the high-voltage power that's out there and actually as they're going to pump 800 volts in, they're going to need that power protection that power hot swap is going to be really important for us. the conversion, right, the step down from the power coming into the data centers and going into the racks, really important piece of business for us. So we are very well positioned across the -- sorry, and then power delivery. So those 3 areas on the power side are about half of our data center exposure and the optical is the other half. And as we said, that business has grown 50% quarter -- year-over-year for 3 straight quarters for us.

Yes, amazing. Can we talk about M&A? You were pretty active back in the 2010 time frame, not as much lately. I mean the broader Analog market is pretty fragmented. Nobody has more than 18% share. Do you see areas where you can be a consolidator and what would the characteristics be of a business that you might look to buy?

Sure. So I'll start with my traditional opening is we're very happy with our Analog, mixed signal and power portfolios, right? We don't feel like we've got any major gaps there that we need to address. The area where we continue to look from a potential M&A opportunity also aligns pretty well with what we're investing in organically internally. So we certainly, over the last 2 years, have invested very hard in software and digital capabilities and AI capabilities. And so we continue to look for opportunities to accelerate our time to market, identify a technology, a platform or teams. And so those would be some of the more obvious areas for us to be able to accelerate in those three spaces.

But I would tell you one of our primary objective still is make it back to your earlier question, is making sure we maximize those maximum synergies. So that's how we're thinking about M&A. Because I do think if there's opportunities in those areas to help us accelerate because what we see is the combination of software and digital with our Analog foundation is that, that opportunity to provide solutions at a higher level, which what we hear from customers, and Vince talks about this all the time is it's a very complex world when you're dealing with the Analog and if and the add-on of software and digital help us decomplexify it, make it simpler, bring us a solution, which is why those are important areas for us. And we are investing heavily organic but would also spend money if we identified the right kind of acquisition externally.

And let's talk about gross margins. So fiscal Q1 is flattish if you assume normal seasonal in fiscal Q2, not that that's what you're guiding. But if you assume that, that is probably about flat, let's say, 70%, maybe some upside as you move through the year from mix and from utilization as things get better. So where -- like if we did play out where you grew seasonally through the year and in that scenario where you're up 20%, where can gross margin go to in that scenario?

In your hypothetical of growing at that 20%, I think we'd see margins in the high part of the 70%, closer to 71%, would be my guess. Yes. I mean if you just think about the -- and it still is important and -- the mix element for us is really important just given the difference in profitability of industrial versus auto. But if that growth comes in a balanced way, led by our communications and our industrial, then I would expect to see that more margin accretion. We do actually think even in a lower growth scenario than the one you described, we will continue to get margin accretion. Our global operations team has done a very nice job offsetting a chunk of the additional depreciation headwind we got from our resiliency campaign. So I think there will be margin accretion even in a lower growth rate environment in 2016.

And maybe talk about OpEx. It was up a lot this year. It was up mid-single digits pretty much throughout the year. I think some of that was going from a no bonus environment to actually paying bonuses this year. So probably the comp is a little tough as you kind of go into next year. How do we think about how much OpEx will grow relative to what occurred this year?

From a rate perspective, significantly less one of the big components you hit on is the variable comp. We went from a very low number to a significant number. Our plan is based on revenue growth and margin, both of which we had in two. And I think I said back actually in one of our quarters in that quarter when we had 1 of those big incremental growth increases, $57 million increase with all variable comp. So it has been a very significant headwind to margin accretion -- operating margin accretion. Despite that, we did grow operating margin 100 bps this year. So I feel good about that. The opportunity going forward is for more accretion because we now have it baked into the baseline compare a robust variable comp in '25. So the increment from '25 to '26 is a fraction of what we have had from an increment in.

Great. I wanted to sort of end by talking about book-to-bill and bookings. You don't give us an actual book-to-bill, but you did say it's a little -- it was a little less than one for fiscal Q4.

I think parts of our business were a little bit less. Our overall book-to-bill exiting Q4 was above one in -- and if you think about the businesses, and this won't surprise you based on how I've described where we think Q1 would go, Industrial was above 1. Communications was above 1 and actually communications was the strongest from a book-to-bill perspective. auto below, and that's where we see that guiding sub-seasonal from an auto perspective, and the consumer is always sort of low double digits seasonally down. And so that had to build sub 1. But in aggregate, company-wide, we were above 1 book-to-bill.

Okay. That explains why you're guiding above seasonal then for fiscal Q1. So I guess the next question is, how have bookings progressed throughout this quarter? Have they been strong? Is it consistent with the book to oil being above 1 like it was last quarter, a little bit above one?

For the -- I don't update intra-quarter in the quarter. But from a linearity perspective, actually, the linearity of bookings in 4Q was pretty solid linear. Not a lot of noise. We had some noise as we talked about with bookings in the prior 2 quarters around the China auto, but what we saw was pretty stable growth in the bookings. And which is why we have the outlook we have.

Got it. And then just within aerospace and defense. Can you talk about how big this is within the industrial segment. I think this is very unique exposure to you through the Hittite deal that you did. How big of a piece is that within your....

It's about roughly 20% of our industrial is aerospace and defense. And that's one of those areas. I think Vince talked about it on the call, right? The acceleration we've seen in aerospace and defense after the Hittite acquisition because you think about the RF and microwave and the applications in the aerospace and defense that use that. very strong growth driver and our ability to incorporate those technologies into modules, which sell at dramatically higher ASPs than our average portfolio has been a key growth driver for us.

Great. Well, thank you, Rich. We're out of time. Thanks for taking the time. Appreciate it, everybody.

Thank you. Thank you very much.

Good morning, and welcome to the Analog Devices' Fourth Quarter Fiscal Year 2025 Earnings Conference Call, which is being audio webcast via telephone and over the web. I'd like to now introduce your host for today's call, Mr. Jeff Ambrosi, Head of Investor Relations. Sir, the floor is yours.

Thank you, GG, 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 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, 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 maximum 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 and due to our expanding design pipeline industry transitions to HBM4 and expected double-digit growth in hyperscaler CapEx.

In '25, robust automation presenting 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 prioritize 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 was 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 investments 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 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 a 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 419% and includes the headwind associated with the normalization of variable comp. 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 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 and functionally safe power solutions. For the full year, automotive increased 16% to an all-time high, driven predominantly by a 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% and 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 and while days of inventory declined by 1 to $1.59. 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 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. The -- 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.

All right. Thank you, Rich. Now let's get to our Q&A session. [Operator Instructions] With that, we have our first question, please.

[Operator Instructions] Our first question comes from the line of Vivek Arya from Bank of America Securities.

I had a near and the medium term. On the near term, I think you're guiding Q1 slightly up, which is a little bit above sees. So I was hoping you could give us some color by segment. where you're seeing this trend? Because I do think industrial was slightly below what you had thought in Q4. So just any dynamics going into Q1? And then if we zoom out in, I mean, if I were to just annualize Q1 guidance, that suggests a very strong kind of 12%, 13% sales growth year in fiscal '26. And I was really hoping to get your perspective as you start the new fiscal year on what you're seeing from a broader macro perspective and whether this kind of growth rate is possible in fiscal '26?

Sure. Thanks, Vivek. Rich here. 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 for 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 tariffs 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. So maybe if we look year-over-year, Vivek, so we believe we're well positioned to see broad-based growth in '26. And I think, cyclical as well as many idiosyncratic factors giving us tailwinds. My expectation is that in 2026, industrial and communications will lead the charge. I think when you look at industrial and comms, the -- as I said, the cyclical dynamics are good, breaking inventories out there. I think both of those markets bottomed some quarters ago. data center, which is going to see again, we believe, a strong surge in CapEx. We've got good exposure to that sector, and it's 2/3 of our comms business at this point in time. Aerospace and Defense as well as ATE, which are together about 1/3 of the industrial market. We've got strong content growth stories in both and coupled with the ADI demand surge in the ATE business, I think, is very, very well positioned.

I think as well in consumer, we talked a little bit on the -- in the prepared remarks there about the higher content in key applications. And so we've got tremendous diversity in that business at a level we never had before as a company. So both in applications and customers and platforms we're well positioned. Last but not least, if I talk a little bit about the auto sector. It's been -- I think SAAR has really been flat now for quite a while. We see that persist in '26. And given that we've been able to show against our 10% content growth per annum. We see that continue given the strength of the pipeline that we've got. All that said, we've got a very uncertain macro environment, but my expectation is all the end markets will be up despite the outlook from a macro perspective.

One moment for our next question. Our next question comes from the line of Joe Moore from Morgan Stanley.

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. So for us, auto has been our strongest market, right? Double-digit CAGR through cycle driven by secular content gains, compounded by our share gains, particularly in connectivity and power for ADAS and next-gen infotainment systems Here, I would know, we've had pretty significant share gains in China, which where you see a lot of the light vehicle share getting increased so that's been beneficial. Near term, the market has been more resilient than we and many have predicted, right, evidenced by the stronger volumes on vehicles. We do think some of the upside we've seen in the volumes in our business this year was tariff and policy related. We've talked in prior calls about our view that there might have been some pull-ins I can't be precise or certain, but we did make that estimation. Given this, we did approach Q4 with some caution and expected to see, I think I said on the last call, we thought we'd see some of this pre-buying unwind in the fourth quarter. That did not appear to happen to us.

Our results were fairly seasonal and bookings were normal with a book-to-bill just below 1, which is actually pretty typical for Q4. And we're still being a bit cautious on the market as it's unclear how the tariffs and volatilities we saw will ultimately impact us and our customers. And also just given short lead time orders visibility tends to be pretty low right now. So as we think about our Q1 outlook, is a subseasonal quarter or down mid-single digits sequentially, but up year-over-year. And given the content gains in this market and the pilot of design win traction that Vince mentioned, we do think fiscal 2026 will be another strong year.

One moment for our next question. Our next question comes from the line of Stacy Rasgon from Bernstein Research.

I wanted to ask about gross margins. You sort of talked about being at 70% gross margin is around $3 billion. So you're sitting over there and you're still -- I mean, even in the quarter, you came in a little below 70%. As far as I can tell, the guidance implies gross margins relatively flattish around that 70% range, you can let me know if that's right or not. But I'm just wondering why we're not seeing more leverage on the gross margin line, especially as utilizations are going up and everything else, like why shouldn't we expect that more leverage on gross margins?

I'll take that one. So obviously, with our interesting lean in gross margins, where we can see the impact that we get from the innovation premium. We did increase quarter-over-quarter and year-over-year and we did have higher utilization and some favorable mix. We didn't get to the 70% as planned as the mix component wasn't as strong as we were expecting. As we've talked about, we had a much stronger result in auto which kept the industrial mix a bit lower than we planned, and that's what kept us from getting all the way to the 70%. Now if I look out to Q1, your margin percent for us is typically lower in Q1 seasonally given the annual shutdown factories for required maintenance and around the holidays in conjunction with customer shutdowns.

However, based on our outlook, we are anticipating that the higher industrial mix in Q1, which we think will offset the seasonal component and hold gross margin flat. So you're right, the embedded is a flattish gross margin where we get an offset from higher mix, which will offset the pressure from the shutdowns. And then I guess, and the last piece, as we think about the continued go forward, Stacy, at this revenue level, One of the things I'd like to remind is we did have a pretty significant capacity expansion while we were addressing our resilience over the last several years. And so it will take us higher revenue dollars to continue to expand beyond 70%. And also, as we've talked about, the continued movement in mix. And given the strength we see in industrial in going into '26 we expect that, that share of our business will continue to increase.

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

One moment for our next question. Our next question comes from the line of Christopher Danely from Citi.

Just a follow-up on Stacy's question. Has the relative gross margin levels, have those changed at all between the end markets? Have any of them gone up or down versus the corporate average, I guess, just to cut to the chase, have the auto gross margins gotten a little worse relative to the corporate average over the last like 2, 3 years or anything else changed?

Chris, I would say the way we've characterized the individual end market margins versus average has not changed in any meaningful way.

One moment for our next question. Our next question comes from the line of Timothy Arcuri from UBS.

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. So Tim, I'll start with the synergies. So we began the conversion process, the conversion of the pipeline and began in earnest in '24. It contributed tens of millions of dollars to ADI's top line in '24, it's clearly accelerated in '25, and it's in the hundreds of millions against our $1 billion target by $27 million. And we expect an even stronger contribution in 2016 given the momentum that we have in terms of new products and cross-sell. So we're seeing -- as we said when we acquired Maxim, we saw tremendous complementarity in terms of some technology niches that Maxim filled, particularly in areas like power these connectivity structures that we use in automobiles and now industrial products. So the complementarity actually works for ADI right across the spectrum of applications, but particularly auto, as I've just said, consumer, health care and data centers. So I think we are well on track to meet our commitment possibly even a little earlier than what we thought. Rich, do you want to take that?

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.

One moment for our next question. Our next question comes from the line of C.J. Muse from Cantor Fitzgerald.

Based on your prepared remarks, you talked about 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 strikes. 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. Maybe I'll just give some color and Richard can give some numbers. Yes. So look, specifically when we talk about there's the data center and the ATE businesses. And if I look at data center in '25, it grew by 50%. And the ATE business, which also benefits from the the skyrocketing compute intensities, the new memory types that are being used as well as new memory chips, that business, so the ATE business grew up 40% last year. And we believe we'll see that growth continue in '26. If I just talk about where we are data center, I think, as Rich said in the prepared remarks, is running about $1 billion run rate at this point in time. And there are really 2 primary sectors. There are 1 is at the electro-optical interface. And we're seeing tremendous upsurge in demand for 800 gig. Now we're seeing 1.6 terabit electro optical interfaces that require very, very sophisticated power management and control systems.

And then there's power more generally, I think, in the areas of protection, we're beginning to see a shift in very, very high voltage technologies that require very sophisticated monitoring and control. There's power conversion and power delivery. And we're seeing our portfolios in those 3 areas gained significant traction. On the delivery side, we have mentioned before, vertical power. That technology now is beginning to be adopted broadly. So we're at the kind of -- we use a term in the electronics industry. We're at the neck of the curve. We're beginning -- I think we're in place to see exponential growth there. ATE, $800 million run rate. And as I said, very, very well positioned with all the key players, both the vertically integrated players as well as the in chip testing. And as the shift to HBM4 takes place, we're going to see higher pin count more complexity, more speed, basically, more instrumentation compute density in our chips. So I think we're in a good place from a customer engagement standpoint, from a technology standpoint. My sense is we should see double-digit growth in both those areas over the next few years. Rich, do you want to add anything?

I will add my concurrence on your view about the outlook for the next few years? These areas, I look at -- if you look at the external factors, particularly around that the data center piece and the high-performance compute, the forecast continued forecast from all of the hyperscalers and the big buyers in the space continue to go up and even recently, several of the large hyperscalers have added even further increases to their CapEx plan. So I do think that, that near medium-term spend is going to continue, and we should be a big beneficiary given our strength there.

One moment for our next question. Our next question comes from the line of Harlan Sur from JPMorgan.

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 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?

Yes. Thanks very much for the question. So yes. The journey for ADI in that aerospace and defense market really took off in earnest when we acquired Hittite, and we got Hittite's really high-quality RF and microwave portfolio, which is center to all the communications activities right across the aerospace and defense market from defense systems, every type of defense system you can imagine to satellite communications. The primary portfolios we have there are obviously microwave and RF sensors, the highest performance conversion products that we build on the precision and high -- very, very high-speed signal processing side are central. And increasingly, when we when we acquired LTC and Maxim, we were able to cross connect with all the signal processing technologies, the Powertech the power management technology. So if you look then at the market drivers, you've got -- the world isn't becoming any more peaceful. So there's going to be increasing capital deployment to build defense systems globally, we're seeing very strong demand, an increase in demand in Europe and beyond.

And we work with all of the primary OEMs. And so that -- all that coupled with increasing ASPs. I mean some of these products we built attract tens of thousands of dollars per system. So I think that business has the capacity by the end of the decade to more than double.

Our next question comes from the line of Joshua Buchalter from Cowen.

Congrats on the strong results. I wanted to follow up on the comments about fiscal 2Q being the seasonal plus mid-single-digit percent. Could you maybe speak to what's driving the confidence and the visibility there? Any metrics you're able to give on lead times? And then bigger picture, how has 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. So first, I didn't guide for Q2. I confirm what the historical seasonality is. As we've been talking about, right, we still have don't have a ton of visibility beyond current quarter plus 1, right? As we've talked about, the times are -- most of our products have lead time sub-13 weeks. So we get a lot of orders in quarter. We got a lot of quarters -- a lot of orders with short lead times, which does reduce some of that visibility. So I think on the first part of your question, I don't think we've necessarily seen an improvement in visibility over the last 2 years, although I do agree, I think that the -- we've now got broad strength in a number of the areas that Vince described but given where we are from an inventory on hand position as well as our cycle times, we're not getting a ton of outside of a quarter visibility.

One moment for our next question. Our next question comes from the line of Tore Svanberg from Stifel.

Yes. So Vince ADI has been always very thoughtful about allocating R&D dollars and the economy is changing in the form 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 and perhaps areas you would like to deemphasize as a company.

Yes. Thanks, Tore. Yes, when I look at the analog space, in the core analog business, we continue to push the edges of signal processing, data conversion systems and precision as well as very, very high speed. I think power management for ADI is still an opportunity with a lot -- a much, much bigger growth story. So that is a place that as we've gone through our strategy planning cycle in the last few quarters here, we're dialing down on for sure. There are areas as well of our digital portfolio, where we see very, very strong niches for what we do in terms of, for example, low parallel latency, these heterogeneous compute structures as well as our technology. So I mentioned during the prepared remarks, how we're enhancing the functionality of our core analog technologies by using machine learning techniques, for example, in base stations in the consumer area as well. So -- but I think most of what we do is making sure that we have the platforms to be able to compete globally across all the geographies across the spectrum of markets that we find most attractive some of the most important problems.

And what I can tell you is that our customers are asking us to do more and more to their complexity and help them speed up their innovation cycle. So that's when we think about the investment portfolio, we're very opportunity-rich and we've got a very high-quality problem, which is picking the most valuable opportunities in that spectrum of that's replete with opportunity.

Thanks, Tory, 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.

This concludes today's Analog Devices conference call. You may now disconnect.

Okay. Good morning, and welcome to JPMorgan's U.S. All Stars Conference here in London. My name is Harlan Sur. I'm the Semiconductor and Semiconductor Capital Equipment Analyst for the firm. Very pleased to have Rich Puccio, Executive Vice President and Chief Financial Officer at Analog Devices here with us this morning.

For those of you that don't know the Analog Devices team, leader in high-performance mixed signal RF and analog semiconductor solutions, strong position in power management, very strong position in signal chain processing, both digital and analog, which is the technology that bridges the real world to the physical world to the digital world. Best-in-class growth operating free cash flow margin, strong capital return program, very, very diversified business, right? Industrial, automotive, comms infrastructure, 85% of total revenues.

So Rich, thank you very much for joining us this morning.

Harlan, thanks for having me.

So why don't we just start off with sort of where we are in the semiconductor cycle. At the same time last year, second half of year fiscal '24, the team was in the second year of the industry's cyclical downturn. You're driving about 18% year-over-year declines in the second half of '24. But you did start to see sequential growth trends, which continued into this year. You drove the positive year-over-year inflection in the April quarter of this year, expect to maintain that positive trajectory going forward. Take us through the dynamics over the past year and more importantly, your view on the cyclical dynamics in your business sort of going forward?

Sure. So if I rewind back to that Q2 '24 period for us, that was when we first called what we thought was our bottom of the cycle after what was -- in the words of our CEO, the deepest and longest down cycle he'd experience. And also accompanied by 1 of the worst inventory correction.

So at that point in Q2 of '24, we thought we were largely through the inventory correction with our customers. We did think there might be a few pockets, and I'll talk about that as we work through the trends. But we did think we had hit bottom, and we thought we would start to see some modest recovery in the back half of '24 with some single-digit increases sequentially in revenue. And then we -- what we had thought at the time is as we start to see the broad market pick back up and some of the cyclical upturn happened, we would start to see some acceleration in '25.

I think if you go back and listen to Vince's guide as we were exiting the year, we thought, I think he actually said '25 could be a growth year for us. And in fact, we have seen that happen, right? We started to see bookings trends improve. And we certainly had some parts of our business that were very resilient and held up well.

So look, we're -- at our core, industrial is 50% of our business. So it's super important from a growth perspective for us. And early on, we had 2 parts of our industrial that were really doing well and have proven more resilient. That was our aerospace and defense piece and then our ATE business. So the aerospace and defense, obviously, for us is a really important area. They require very high performance and have very high standards and also you're seeing this now more broadly, the increase in defense spending that's happening all over the place in the U.S. and around the world is continuing to create demand. So that was an early leader and 1 we expect to continue to show growth.

Similarly, on the ATE side, there's no -- it appears to be no letup in the AI/data center CapEx spending patterns, which we also think helps us on the ATE side. But as the year progressed, we started to see the other parts of our industrial business pick up. So we talked about automation was a real challenge. That was 1 of the areas where the inventory correction lasted a little bit longer. And in fact, we had a couple of down quarters in '24 on the automation front. We've now had 2 consecutive quarters of growth in automation. So we feel like that part of the recovery is now underway. And we're also -- when we look at the results we just posted in Q3, we saw growth in all of our end markets inside of industrial across all of our geographies. And we had said from the get-go, we thought if the recovery was real and the cyclical was going to happen, industrial would lead the way, and it has. So that's been really important.

And then if you just look a little broader, obviously, automotive for us has been very strong. We're on track to do a third record year of auto revenue. 3 of our last 4 years in auto have been record revenue levels. We are forecasting a little bit of a correction in the fourth quarter.

But overall, still tracking to a record year.

You look at our consumer business, for instance, which we're relatively underweight there, but it's a really strong business for us after going into the downturn, it's come out with -- now we had 4 straight quarters of very strong growth in consumer. And that's reflective of a couple of things. One is we did -- our teams have done a really nice job diversifying our portfolio. So we aren't as dependent on single sockets in that business. And we look across the breadth of our portfolio, it's now products in handsets, in hearables, wearables, gaming, so the expansion there has helped fuel the consumer growth, and we think that helps continue for our growth into '26.

And then the final piece that you mentioned is the comms infrastructure space. That's an area where we've benefited tremendously from the AI drive, and we expect that, that will also continue to grow. That business benefits from the fact that all of those data centers are using our power management products and our optical connectivity solution.

So those are 2 areas where we continue to see growth today. Those are also 2 areas where when we talk about our new design wins, we had 2 design wins in that data center space around vertical power and optical switching that will start to generate revenue for us in '26. So if you look, the trends have been very positive.

The other thing that we noticed I've talked about this a bunch as we've been managing our inventory, and we'll talk about that later. One of the things we watch for is what happens in the broad mass market industrial. And that did not come back as fast as the rest of the market, but we saw signs that was coming, and we've now had 2 straight quarters of the mass market part of our business growing, which again, is just more confirmation that we think we are into the cyclical upturn.

Now like anything else, the macros are still uncertain, given where we are in some of the trade and tariff stuff. So getting full visibility out to '26 is a bit challenging just given those trends. But we feel like from a market position across all of our end markets, we feel like we made a ton of progress, and you see it in the results we've been posting.

We learned this past weekend talking about tariffs and geopolitical dynamics, where we learned this past weekend, the Chinese Ministry of Commerce announced antidumping investigations targeting U.S. analog chips, alleging significant price declines between 2022 and 2024, which is kind of interesting because 2022 through 2024, by and large, a big part of that was the chip supply tightness in the industry where you and others are actually seeing stable to increasing prices. But nevertheless, there was this Ministry of Commerce out of China, alleging these antidumping investigations. Has the Analog Devices team been notified by China officials of this probe, like what's your view on that?

So I'm unaware that we've been reached out directly on this probe. But just for context perspective and Harlan hit it right, I've talked about this in other sessions. In '22, a significant amount of the growth that ADI saw from a revenue perspective was price increases. So certainly, we weren't dropping prices.

'23, we had incremental price increases, not nearly as significant as what we did in '22. And then you've heard me say in '24, our pricing was relatively stable, and we are expecting we'll finish '25 with prices relatively stable. So big swings in prices in the last 2 years have not been part of our go-to-market. So we will continue to monitor.

Obviously, we do sell into China, but we do tend to play from a context perspective, we do tend to play in the higher end of the ASP bands in China because where we're at our best is in the high-end, most complicated solutions where you need to have application-specific knowledge and outstanding portfolio of Analog, we have a 60 years' worth of built Analog portfolio. So I think that the fact that we play at that high end at the higher price points also as important context the sort of less than $0.50 ASP band in China is not a significant part of our business.

Yes. Let's talk about, you gave us a great overview of the trends that you've been seeing from a shipment and revenue perspective in your business over the past year. Let's talk about orders and bookings, which is a little bit more of a view on sort of the forward-looking trajectory of the business. And back last year when we hosted you, the team had already driven sequential order growth in 3 out of the prior 4 quarters. Those bookings trends continued into this year. I think including the July quarter, which you reported not that long ago, the team has now driven sequential order improvements in 6 out of the last 7 quarters. You're about midway through this quarter, have overall order trends continue to improve? And how do you see order trends by end market or geography.

So I tend not to do in quarter updates to our booking trends, but I'll go back and remind you what we talked about at the earnings call. We continue to see good bookings momentum. We saw relative linearity over the course of Q3 from a bookings perspective. If you remember back, we did talk about we had some anomalous booking trends in Q2 that normalize pretty quickly in Q3 over a 4-week trail or a 13-week trail.

I believe your turns business, which is orders that you get inside of the quarter through cycle has been about 15% of total sales. Typically, during the initial stages of an upturn, your turns business tends to be higher as more customers clear inventories and then they find that they have to place orders within lead times. What did you see last quarter and so far this quarter in terms of turns order activities?

So last quarter, we actually saw, as you described, as we saw the cycle upturn continue we did see higher-than-normal turns business in the third quarter. And some of that's reflected in us achieving over our -- over the high end of our guide was we got a bunch more turns in the quarter. Our guide for Q4 anticipates a more normal level of turns, obviously, on a continuing growing revenue number. I mean if you think about -- if you just look at where we are coming off of our bottom of our cycle. I think if you take our Q4 guide, we're up almost 40% opposite off the bottom. So it continues to be strong. And like I said, confirming that we've been in the upcycle here.

Team has done a good job of shipping below your customers' channel consumption levels over the past 6 to 7 quarters where you exited July with about 160 days of inventory on the balance sheet. How do you anticipate the trend on your inventory this quarter and you've been extremely disciplined on channel inventories, right, keeping channel inventories below your target range of 7 to 8 weeks. Where do you see that trending this quarter and maybe over the next couple of quarters?

All right. That's a lot to unpack. So I'll start with the balance sheet inventory. So 1 of the things we've talked about during the supply shortage, we found there was a significant advantage to have more of the inventory on our balance sheet than in the channel, gave us more flexibility in how we address customers.

So there's 2 things happening. One is we spend a significant amount of time. On a better part of a year, reducing our balance sheet inventory because we have gotten up to a number of days that was very anomalous for us. And we drove that down. But if you remember, about 3 quarters ago, I started to signal that we would start to put more inventory dollars on our balance sheet. So we were well positioned to capture the upturn in the cycle. So we have added inventory dollars, but given the revenue growth we're seeing, you've seen the inventory days come down, I think, depending on how you calculate it, roughly 160 days of inventory on our balance sheet. And I do expect in Q4, we will add additional inventory, but probably days will stay relatively flat. Part of that is we start to see the increase in bookings and demands, whether returns over the next quarters is having sufficient inventory on hand to be able to turn quickly and fulfill those orders. So we will keep more.

We've also learned we can run our channel much leaner given the back-end improvements we've made in our -- and what we've now got for back-end cycle times, we can keep less inventory in the channel. I actually don't think we ever get back to the 7 to 8-week model. We just don't feel like we need that. We have very good relationships with our distribution channel, and I actually meet with our biggest partner quarterly to make sure we are delivering what they need to satisfy our customers. And we've been successful doing that at a lower level, given the improvements we've made in our ability to fulfill. So we've been running less than 6 weeks in the channel.

If we continue on this growth pattern, we probably need a little bit more than 6 weeks in the channel as you think out medium term. But currently, we feel pretty good about where we're running. And I think that's -- it matters -- it's been something we've been super aggressive about and it positions us well going into the next year.

I guess 1 of the benefits of keeping a very tight control and lean inventories within the channel is that you can get almost real-time feedback from your customers, right, in terms of inflections up or inflections down. Has that been -- is that part of the reason why you're wanting to keep inventories relatively lean relative to your target levels?

So as I said, we've moved off the 7 to 8-weeks because of the improvement, but the lean has largely been so that we can keep more control on inventory on our balance sheet. So should there be challenges -- the next supply chain challenge, we have more control -- inventory once it's in the channel, we don't have the same ability to move it to a different geography, et cetera. So having more of that our balance sheet is important.

Now look, we're going to continue to be super prudent about the balance on -- in both places, right? So I don't expect we're going to see growth in our days because we're continuing to grow revenue. But I think having it on our balance sheet gives us flexibility in dealing with customers.

And your ability to move very quickly, you guys put a lot of your inventory in die bank, right? Is that correct?

Yes.

So from die bank to finished goods is relatively short cycle.

Yes. Our back end cycle times now run around 6 weeks.

6 weeks.

Yes.

Okay. So putting everything together, given your 13-week lead times, roughly, the team had qualitatively described a forward view that the January quarter was likely to be a seasonal type quarter, right? Revenue is down low single digits sequentially, with the seasonal pickup in the April quarter. Is that how the team still sees the business profile as you move into next year?

So interesting, we had -- the majority of our products are now at sort of sub 13-week lead times, as you mentioned, we we're getting a lot of turns. So we still sit in that same position where our visibility really is only a quarter out, which is why we guide a quarter and not beyond. And I actually think what we said coming out of the quarter to help folks think about it was, look, we don't have enough data in our backlog or our numbers to give a hard look at what the next quarter would look like, but typical seasonality would be as described. So -- and that continues to be the best way to think about it at this point, which for us, typically, that fourth quarter is down seasonally in the sort of low to mid-single digits. And that's a little different by end market. As you can expect, it's a bigger drop in the consumer market percentage-wise, given all of the inventory build that goes into the consumer season in the calendar Q4, but we would typically also see down across the other businesses.

If you think about what happens, we take a shut down. Many of our customers have a shutdown. So not unexpected to see that seasonal pattern, but we do think that allows us to get back into a more normalized seasonal pattern going forward.

Let's step back and take a look at the longer-term view and the longer-term profile and trajectory of ADI's business, right. So if I look back over the last 20 years, you've grown your revenues at about a 9% CAGR. That's about 30% faster than the overall semiconductor industry. Earnings, free cash flow per share, you've grown at 11% to 13% CAGR over that period of time. Some of the growth has been inorganic, but majority has been organic. And on a go-forward basis, this was the last Analyst Day and a couple of years back, you were targeting to grow revenues at a 7% to 10% CAGR, earnings at a 10% to 11% CAGR, $15 per share of earnings power in fiscal '27. This was a target that was put out a number of years back. But given the severity of this past down cycle, how should we think about the team driving back to that sort of $15 of earnings power. Is that now maybe fiscal '28, fiscal '29?

So I'll go back to the beginning. So 20 -- at our Investor Day in '22, the company put out its new long-term model, which had 7% to 10% growth rate, which was a pretty significant step-up from sort of the historical industry growth rate that folks have seen. And if you think about what we were describing and expecting there was 3 things we knew or thought would drive an increase up in that revenue from the historical lines. We figured we get an incremental point of growth out of our alignment with a lot of the cyclical megatrends. So whether it's the energy transition, whether it's the electrification of autos, whether it's more automation in the factories and warehouses. So there were a number of those sort of macro trends that we were in leading positions. We thought that would give us about 1 point of growth.

We also, as we've talked about historically, in our space, the industry, you would give back points plus of pricing every year. The old Moore's law, we get more efficient here too. That changed for us during the supply chain crisis and now the pressure -- inflationary pressure on almost all of the inputs in the semi cycle continues. So we have not been giving back the price like we have historically, and we figured that was good essentially another point step up.

And then the third piece that's really important is, when we did the Maxim acquisition, 1 of the things we said is by 2027, we pick up $1 billion worth of incremental revenue from synergies with Maxim.

So that was how we got that step-up, which is what's helped us obviously achieve some of the growth that we've been talking about. And then obviously, we continue to drive some leverage.

What we didn't contemplate when we did that model in '22, was that severity and the depth of the downturn. So obviously, getting something very unusual what have to happen for us to get back to a $15 share price in '27. But what we have demonstrated is continued accretion in EPS, right, in addition to getting more leverage from a gross margin perspective. And certainly, in '25, most of the incremental leverage is from a gross margin perspective, given the growth we've seen in OpEx.

If you remember, our OpEx is A significant driver of the year-over-year changes in our variable comp plans wherein last year, we didn't pay very much variable comp because we had no revenue growth. This year, we have a lot of variable comp. But we do get leverage out of we've been getting leverage out of gross margin and you see that. So you're seeing the growth. So I do think you're right. It will take a few more years. I do think we still have the ability to get to that.

The other piece that contributes and has been helping is our capital return policy has allowed us to retire a fair number of shares, certainly since I've been here, and we continue to target returning 100% of our free cash flow to shareholders. From a framing perspective, tends to be 40% to 60% of our free cash flow goes into our dividend. And then the remainder were used to retire shares.

So we will continue to target that return policy, which will help us both on the -- will help us on the numerator and denominator to get leverage and have less shares.

A strong driver of the faster than overall industry growth that the ADI team has put in over the past number of years, right, a strong indicator of that momentum is your design win pipeline, right? You grew your design win pipeline by a double-digit percentage in fiscal '23. You did it again, double-digit percentage growth in the design win pipeline in fiscal '24 across all end markets. How is '25 tracking so far? What are the areas of your portfolio or end market exposure? Are you seeing the strongest expansion and revenue opportunity as you look at the design win capture?

So a great summary. So '24 was a record design win year for us and '25 is on path to exceed '24 from a design win perspective. And it is actually, thankfully very broad the design win success we've had, certainly have some of the heaviest and most significant growth in design wins has been in automotive space. And that's clearly indicative of the -- we invested early to get in on some of the significant trends in automotive.

If you think about connectivity, whether it's the A2B or our GMSL functionally safe power. So we continue to get design wins in those areas. And as more and more of those features going to more and more cars, we get more and more opportunities.

We've also seen design wins across industrial. And as I mentioned before, the broadening of our consumer portfolio is because we've had design wins that continue to ramp. So we feel pretty good that we're getting broad growth from a design win perspective.

On the comp side, we've talked about already the design wins we had on the vertical power and the optical networking. So pretty broadly across our portfolio. And for us, it's a really good indicator of where we are. And I think we've had strong design wins over the past 2 to 3 years and a good indicator of where we'd be 3 to 5 years out from the design wins.

Let's focus on your end market exposure. Industrial, 45%, 50% of total revenues composed of a set of diversified businesses across different markets, factory automation, health care, instrumentation and test, energy infrastructure, aerospace and defense. Help us understand the sizing and growth of the different subsegments. And as the team moves to this potential upturn, right, what subsegments are likely to outperform going forward?

Sure. So from the key components from an instrumentation and test that tends to be in the 30% to 40% of our revenue. And we'll go back to the -- I'll do the growth factors after we go through. And then you think about ADEF and automation, those are both a little bit above 20% of our revenue. Our health care business is sort of in that 10% to 12% range, and the remainder is in our energy management space.

And so when you look at the drivers that we've been talking about from an industrial perspective going forward, right, we continue to see there space and defense as a growth vector, right, with the growth in spending on aerospace and particularly on the defense side of things, both domestically in the U.S. as well as what's going on internationally. We think that continues to be a growth driver.

You look at the AI and data center growth, which does not appear to be slowing at all that will give us growth vectors, both in our industrial because of what we'll see in the test business. But it will also give us opportunity in the wireline part of our comms business. So that's pretty -- those are 2 areas where we expect to see continued growth going into the future given the macro trends that support those areas.

We are starting -- as we've talked about starting to see growth in health in the digital health care space, right, where we've got design wins there and products ramping. And then on the consumer side, as I mentioned, we have a bunch of new sockets that we expect will continue to grow going forward.

So on the -- sorry, I missed that. So on the industrial breakout, so Instrumentation and Test is about 30% to 40%. Automation is how much?

Automation and ADEF are both a little above 20%. And then the health care sort of 10% to 12%, and the remaining is in the energy management.

Energy. Okay. Got it. Okay. One of the strong dynamics among several, which separates ADI from your peers is your strong exposure to ADEF, right aerospace and defense, strong portfolio and mixed signal, RF, millimeter wave, digital signal processing, compound semiconductor products, lots of customer initiatives here. This has been a strong growth area for the ADI team during this last downturn. Has this business broken through? I think, based on the breakout, has this business spoken through the $1 billion annualized revenue run rate or 10% of overall revenues for the business? And what are some of the ADI-specific product cycles within A&D that's going to continue to drive the strong growth into the next fiscal year or over the next few years?

So yes, on an annualized basis, it has broken through the $1 billion barrier. We -- as we said, that it's been 1 of the most resilient parts of our business during this cycle for us. As I mentioned, given the secular tailwinds from an aerospace and defense, we would expect that to continue.

One of the things that's been a big benefit for us is we've always -- first of all, that is a space where high performance and the criteria are very significant. And as we've talked about, our favorite place to play is the highest, most complicated part of the chip market. And so this is an area where that is really important. And when you combine the individual analog products that we sell with -- where we've made a ton of traction in that space is selling modules and subsystems where the ASP premiums are significant for us. So you go from selling individual chips to selling the modules. You go into thousands of dollars per product. And that's 1 of the thing that is from a driver perspective for us, will continue to be a significant element is our ability to capture more value because we are able to do that at the modular and subsystem level. So I think we've got a number of those drivers that support continued strength in the aerospace and defense business for us. And that's -- like you said, whether it's in the any of the categories you described.

The 1 you didn't mention in your list that is also an important part of it is our power portfolio. Also plays an important role. If you think about the requirements of things going into whether it's satellite or missile defense systems, pick your products, the power is also another element that I would add to that, Harlan, from a growth driver perspective.

Yes. And I think as a team over the years, has grown its portfolio organic and inorganically, right? You've been able to drive more dollar value per customer engagement within aerospace and defense and your A&D customers do appreciate the module/reference platform focused because it allows them to get to market faster as well. Any areas within aerospace and defense, you've got SATCOM, you've got UAV, you've got weapon system development, radar, so on. Any specifics end markets -- submarkets within aerospace and defense where the Analog team has particular leadership in? Or is it kind of all of the above?

I think we have got strong positions in all of the spaces you mentioned. But certainly, in the guidance area and in the microwave comps. Those are 2 really, really strong assets for ADI and important assets across that aerospace and defense business.

And look, what customers want from ADI is the -- and 1 of the things we got really good at during the supply chain strategy was getting closer to customers, we get invited in earlier. They want us to solve problems. So oftentimes, it is, here's what we're trying to do, can you provide an elegant solution, whether it's a module or a subsystem or even individual components that help solve our problem. And our success doing that has positioned us really well in that space.

Let's shift to automotive. 30% of your revenues this fiscal year, your auto business will be, as you mentioned in your prepared remarks at record levels. However, here in the fourth quarter, you are experiencing some inventory normalization as you did see auto pull-ins in the first half of this year, right? April quarter, it was a little bit of pull-in from auto customers in North America and Europe. July quarter was a little bit of pull-ins from China auto customers. Here in the October quarter, you and your customers are working down these pull-ins, right, with auto cells for ADI expected to decline by mid-teens sequentially do you anticipate you will exit this quarter with your auto business back to kind of shipping to consumption trends? Or do you see more inventory digestion maybe heading into the January quarter?

So if you think back to when we first raised the advanced buying Collins in auto in Q2. I had said I thought that the pull-ins were largely going to come from Q4 and/or Q1. And then we didn't expect to see any incremental pull-ins. We did actually, as you mentioned, see some pull-ins in China in 3Q. And the result is when we look at what we're going to expect for Q4 is well below seasonal. And I think we said on the call, low double-digit decline.

When you look at the magnitude of that decline relative to our prior expectations, I senses and our analysis -- geez, sorry, our analysis would lead me to believe most of the correction of the pull-in happens in the fourth quarter.

Could there be some small residual amount that flows through in the first quarter possible, right? Because we know we have a precise way, nobody calls to tell me they're pulling in inventory. But our -- but given the magnitude of the correction in the fourth quarter, we think we exit the fourth quarter with it largely behind us and then getting back into a more seasonal pattern.

Got it. And then relative to your broad auto portfolio, you've been driving outsized growth in leadership areas like connectivity, right? You mentioned both in cabin and ADAS. You talked about power management, functional safety. How are these areas of product leadership performing relative to the overall auto business?

So all of the areas you just mentioned are growing at a very strong clip. And in fact, that part of our business now represents almost half of our auto business. So it has been a significant contributor.

And again, it gets back to our early investment to have the right products in those areas, in advance of the market trends and the market trends continue, right? If you look at our auto story, especially over the last 10 years, we've outgrown SAAR pretty significantly. So our content growth gives us over a 10-year period has given us round numbers, 10% growth above SAAR. And what's interesting, and you all see this in what's being put in cars these days. If you shorten that and look over the last 5 years, it's actually about a 15% premium to SAAR for content, and content and share gain, but a big piece of that is content. Because you think about even a moderately priced car in the U.S. and now even a very low-priced vehicle in China, has more in-cabin immersive experiences. They're moving Level 2 ADAS down into more vehicles. And those all create opportunities for the products you just said, right, whether it's A2B, GMSL, functionally safe power, and particularly when we get into the full EV vehicle production, and that's where we get more BMS share. So those are all real content and strong drivers of growth for us in the auto space.

So when you mentioned these growth drivers being greater than 50% of the auto business that includes GMSL, A2B, functional safety. Does that also include BMS?

Yes.

Okay.

I didn't include the BMS and the growth driver because as we've talked about, BMS has been working through an inventory correction this year.

Any visibility in terms of when inventories in BMS could potentially normalize?

We think we're seeing normalization as we exit this year and should see return to growth in BMS in '26.

In '26, okay. Let's talk about AI and accelerated compute. Obviously, it's a very topical. Not a lot of people understand ADI's strong position in AI and accelerated compute. For ADI, AI data center compute networking combination of testing and instrumentation power, optical networking connectivity solutions. The team drove about $400 million in the AI revenues last year. You were targeting to grow this segment by about 30% to 50% this year. How is this subsegment trending relative to that target and you were anticipating the ramp of some 1.60 optical module wins in vertical power delivery end of this year and next year, are these programs still on track to fire as well?

So I'll go back to the beginning where we expect this year's number to be more in the $500 million to $600 million, which tracks the growth objective certainly growing well above the company average. And in fact, if you look at the pieces that are in our comps business. So the wireline part of comms, that part of our business has actually grown 50% year-over-year in each of the last 2 quarters. So continues to grow very strong. And continue to be well positioned, as I said before, given the CapEx trends we're seeing in that space. And the 2 design wins, the vertical power and the optical modules, we expect -- now expect that revenue to start ramping in '26. We thought we might see some in late '25. But given customer schedules, it looks like it will be late '26. And those 2 wins combined when they get to sort of normal shipping volumes is approximately $100 million worth of incremental revenue in that part of our business. So we do continue to see growth above company average in that space.

And then on the -- moving over to the comms infrastructure part of your business, right, strong leadership in signal processing, RF, power management, really strong exposure to 5G infrastructure, cloud, hyperscale, optical connectivity and AI, compute power management, as you just talked about, wired comm infrastructure, has been strong due to AI. But wireless has been weak due to muted infrastructure spending trends by the cellular service providers. However, you did see sequential growth trends in wireless for the first time in a while last quarter, have the positive trends in wireless continued into this quarter? And how do you see the potential profile of recovery for the wireless infrastructure part of your business looking out over the next several quarters?

So we have been talking about the wireless part of our business being down and essentially being a bit of a drag on our comms business. So -- and I think I described it as bouncing along the bottom in the last couple of quarters. So we did see some growth you haven't heard me celebrate that anymore publicly because I do think a bit of that is just being, one, very easy compares to what we had from a revenue perspective in the prior year. And yes, we are shipping higher amounts, and it is in the traditional sort of 5G space. But to your forward-look question, obviously, where we are, there hasn't been any broad expansion in the 5G market at this point. So I wouldn't say that's necessarily a long-term driver for us as we see -- wait to see what the next turn of wireless looks like. But at this stage, at least it is a growing business and not detracting from the success we're having on the wireline side.

I think the mix in the comm infrastructure business has changed pretty dramatically because of that, right? Is it now wireline versus wireless?

The wireline for us is at least 2/3, yes.

At least 2/3. Okay.

May flex a little bit around that, but it's typically above 2/3 right now.

Let's talk about the financials and maybe some of the manufacturing strategy. In the July quarter, gross margins came in slightly below expectations due to some [ undigitalization ] in your Ireland fab. I believe you had some supply constraints. But you had anticipated your gross margins trending to the 70% level this quarter, a combination of utilization improvements and mix. Is the team still tracking to this target? And have you resolved the supply issues with the Ireland fab?

So in reverse, yes, we have resolved the supply issue. And I think we had mentioned that on the call, we thought that we'd get that worked out and be back on track in Q4 to get back up to our 70% margin. And again, the other piece of that, that's really important. One is that supply piece. The second is the mix issue. And if we hit our guide industrial is back up to almost 50% of our revenue, which is an important margin accretive for us. Industrial, obviously, is our highest margin business. So that will continue to be really important for us in the fourth quarter and as we go forward.

So we -- as we said at the time of the earnings call, that's the expectation for 4Q and then positioning us for -- continuing -- assuming continued revenue growth, continued increase in utilization, which should also help us on the margin side.

So utilizations are improving this quarter.

We have had continuous improvement in utilization since we came off the floor in Q2 as we expected. We're still below an optimal utilization, obviously well below where we were at peak margins because we were running even then at what in hindsight, you'd say we're pretty unhealthy levels above normal during the supply crunch.

So as you continue to move through this up cycle, could you discuss some of the key gross margin levels? And whether it's possible to approach the 74% gross margin levels that the team drove in 2022?

Sure. 2 biggest drivers, the mix, which I won't repeat again, getting back to at least a 50% industrial mix helps us get back to margin levels more like what we saw because the peak margin you described was 53%. The other piece is continued expansion in volumes, gets better absorption and deal helps us reduce the variances because if you looked at the drop from peak to trough, it's split between the mix of business and the underutilization caused by the lower amount of factory production.

Now built into that sort of utilization and variance numbers we did double our internal capacity over that period of '22 to '24. You saw that in our CapEx numbers. You also see the benefit today of our CapEx coming back down to normal levels, which is a bit of a free cash flow tailwind for us. See that in our free cash flow margins getting up to 35% on a trailing 12. So those 2 areas, mix and utilization will continue to drive. Those will be the key to driving margin accretion for us.

Back to 74%. I absolutely think we can get back to 74%. We'll just have to be at an entire level than the last time because we're in a 12, 3 kind of revenue number given the doubling of our capacity, the number to get to 74% is quite a bit higher on the revenue side. And depending on what happens in the industrial mix, we'll determine how much higher it has to be.

And the other driver of the strong operating margins and EBITDA margin improvements, again, as we move through the upper part of the cycle is the team has obviously got scale. And so how would you recommend is, again, as we look out over the next few quarters and couple of years as we move through the sweet spot, of the positive up cycle. How should we think about relative to, let's say, maybe that 7% to 10% long-term revenue growth rate, how do you think about the growth in OpEx relative to that framework?

So 1 of the interesting dynamics we had is we have a pretty substantial increase in OpEx in '25 because of the return of variable comp. So the even in a high growth year, again, if we were to have a lot year in 2026. The incremental variable comp would not be nearly what we had this year. So for context, I think I've said this before, the growth in variable comps like 500%, '24 to '25, pretty significant headwind. That should give us some accretion. It's also what's caused us to grow above our sort of historical norm of growing expenses at a fraction of what we grow revenue. So with that behind us, we expect to have continued opportunity to get more operating leverage.

Obviously, the more impactful is getting leverage at the gross margin line, but we will also expect in a revenue growth environment. Again, look, the -- what '26 look like is kind of largely be determined by the macro factors that are still unsettled. But there is some opportunity. We get a bunch of the trade and tariffs up done by the end of the calendar year. We may get some of the rate cuts that people think could be helpful, certainly would be helpful in the auto end markets. So there's a number of those things still to settle that will help guide what '26 looks like. But if we have growth years, we would expect more accretion in both.

I was going to ask you a question about the Maxim revenue synergy target, but you clearly told us in your prepared remarks that the team is well on track to hit that $1 billion of revenue synergies in fiscal '27. So I wanted to pivot more towards the consumer part of your business because we don't -- you don't often get questions on the consumer part of your business, but that business is growing strong. So my question is, what has the ADI team done over the past number of years to inject strong growth? And it seems like it's very diverse, right? Smartphones, client, IoT, wearables, hearables, maybe a little bit of consumer digital health, but what has the team done on the consumer side to drive this pretty strong -- what it looks like to be sustainable revenue growth profile in the consumer business going forward?

Yes, actually, I think you nailed it. We -- the team did a really nice job diversifying the number of sockets and types of sockets we have on the consumer side. So we're not nearly as dependent on a small number to drive growth. And you're right, it's if you described it before, we still have a very strong position in power and touch in the handset world. But then we also have strong position now in hearables, wearables, whether it's your hearing aid, whether it's the monitoring the watches for vital signs, it's a lot of those things, plus also in the gaming platforms. So those have been very strong growth drivers for us, and we expect that, that broader portfolio will continue to drive our growth.

Obviously, consumer is not as important to a growth from a dollar perspective is in industrial. But from a percentage perspective, it has been an outstanding grower for us for the last 12 months.

Perfect. Well, we are just about out of time, Rich. Always insightful. Thank you for participating in our conference today. I look forward to monitoring the execution of the ADI team as we move to this year. Thank you.

Thank you, Harlan. Appreciate it, everybody. Thanks.

Okay. Great. Thanks, everyone. Chris Danely, your friendly neighborhood semiconductor analyst here at Citi. It's our distinct pleasure next to have ADI Analog Devices. We have Rich Puccio, the CFO. ADI is one of our favorite companies. And we think that one of the reasons or a couple of the reasons why we like the stock so much is you kind of get the best of both worlds. As we've seen at this conference, there's a lot of crosscurrents going on out there. I'll leave it to Rich to sort all those out, the Oracle of Boston. But whether or not we have this continued upturn and things get even better, ADI has the leverage as evidenced by, I think they've had the best revenue growth of any of their peers this year. On the other hand, if these macro issues do continue, and we have a little bit of a pause in the upturn. ADI has the high sustainable margins and generous free cash flow to prevent any [ damper ], minimize the damage from that. So you get the best of both worlds. At least that's what I tell people. Anyway so Rich, thanks for coming.

Thanks for having me.

You guys are probably one of the more recent companies to report. So if you could just give us just a brief recap from -- I think it was 2 weeks ago, the conference call, and then we'll dig in from there. And again, thanks for coming.

Appreciate you having me. So for us, and we've been talking about this for a while. We were pretty confident that industrial was going to lead our recovery back out of the cyclical trough, rewind back to our Q2 of we felt like we had hit the bottom of the trough, and we expected that we would start to see some reacceleration in the business with some modest sequential increases in the back half of '24. And then as the cyclical and idiosyncratic drivers for ADI started to play in, we'd see more growth. And that has, in fact, started to play out. You saw in our results, very strong quarter growth led by our industrial business, which is important. That is the bedrock of our business. It's also the most profitable part of our business, and it has grown strongly, and we expect that it will grow again in Q4, which will be pretty far above typical seasonal for us to see as much growth as we've forecasted into Q4. And that's a really important part of our business. And one of the things as we've worked through the cycle and I think a little bit of the chop that we've all seen is not all of the subsegments, whether it's in industrial or -- our end markets have followed the same pattern. But for us, we've gotten to the point now where all of our end markets and in all of our geographies are growing on the industrial side. And we feel really good about some of the -- and we'll talk more about them as we go. I'm sure. more of the idiosyncratic things at ADI that are helping us grow in addition to some of the cyclical pieces. Obviously, we had a really good overall result. And then from an end market perspective, the only thing that was a little bit different, which we talked about now for 2 quarters is we did have a little bit of incremental pull-in activity that we think is going to correct in the fourth quarter. And we've had 2 quarters now and they were a little bit different. So if you remember the conversations coming out of our Q2, we saw -- thought we saw auto pull-ins and estimated that in Q2 in North America and Europe. And then in Q3, we saw some incremental pull-in activity in China. So when you look at the opposite of the strength we're seeing in industrial for 4Q, we will see a subseasonal quarter from an auto perspective as we get that correction behind us but we still feel really well positioned. And record -- '25 will be a record year for us from an auto perspective. Obviously, we continue to have very strong consumer results. We've talked about the broadening of our portfolio of sockets there, and we've had continued to have new wins ramping in that space. I feel really strong across both handsets, hearables, wearables, gaming devices. So that's been a strong part of our business.

And then you look on the communications side, which for us is wireline and wireless. On the wireline side, we've continued to see really strong growth in support of the data center because in the data centers, we're selling in our optical modules and connectivity, and we're also selling in power management products and for hot swap power management, et cetera. So that's been a really strong market for us and growing very rapidly in the back half of the year. So that leads us to where we feel pretty good about where we are in the end of quarter and heading into the 4Q. And we -- as we've talked about a little bit, we are seeing the signs of the cyclical upturn that we've been talking about happening for us, right? We're now multi-quarters into pretty strong growth.

If we sort of take out the pull-in volatility, maybe talk about like how the recovery in your core business has gone, the other 95% of it. Maybe start with at the beginning of the year, a lot of uncertainty out there. You guys are one of the first companies to talk about, hey, business is getting better, bookings are getting better. I remember you were first to talk about the industrial business stabilizing a year ago where you said, hey, half of our industrial business is starting to get better than the other half is not. And then pretty soon it was -- everything is better. So maybe just if we ex out the pull-ins, we'll talk about that in a little bit, but your core business, how that sort of trended this year, starting in, I guess, the Feb quarter, the Feb [indiscernible]

So I -- there was a great tee up. We were really leaning hard on 2 parts of our industrial business, in particular, where we've talked about, we had real strength in our aerospace and defense business and real strength in our automatic test business. So those 2 pieces of our business were very strong from the get-go. And as you think about those, right, the aerospace and defense has been a good market and all of the external economic data and reporting about the increased spend military and otherwise, as Europe rearms itself and other parts of the world start doing that. we feel really good about where we're positioned there for -- currently and going forward on aerospace and defense. And then again, tied into this huge infrastructure boom is on the ATE. All of that infrastructure requires high-bandwidth memory, high-performance compute, which requires more complex testing, which means more content for ADI in the testers, and we have a very strong share in testers. So that was the initial part of the growth. right? And then as we started to progress into the year, and I talked about automation in a couple of quarters, we saw the automation start to turn and automation has now grown 2 straight quarters. We are seeing growth in our Digital Healthcare businesses, and we're also seeing growth in our -- any big energy management area. So across the industrial subsegment, we feel like we've done really well. And that's the idiosyncratic piece. Also, if you think about it from a cycle perspective, we were out in front of reducing inventories pretty quickly. So we've been reducing inventory, both in our channel and at our customers for the better part of 2 years now. And I think that positions us really well because we are at some of the lowest channel levels we've ever been. We're well below our sort of historical 7- to 8-week channel model. So we feel good about where we're positioned there. And the work we do to look at what's on our non-disti customers balance sheets from an inventory perspective, that has the signs there that has normalized back down to levels, and we see it in the orders, net new orders for some of those customers coming through. So we feel good there. And I still think there's room to run because if you think about the sort of the consumption line, assuming that, that industrial business would typically grow 5% or 6% CAGR over any period of time, you run that line out from pick your starting point to where we are today, even with the strength of the industrial recovery, we'll still be below that trend line. We're also still 30% below our peak in industrial. And I think that's an important thing. So I think that we continue to see room for us to grow given we're below that -- still below the trend line and below our peaks. So I think that's an important piece on the industrial side. And other than auto, all of our businesses are still below their peak values.

Yes. By the way, we had a couple of companies talk about how strong the aerospace and defense mil/aero businesses. How big is that for ADI? Is that like double digits percent of revenue?

Aerospace and defense is about 20% of our industrial.

20% of industrial. Got it. I'll take it. All right. So maybe just talk about, since you guys just reported the linearity of bookings last quarter. Did you see like a steady increase? Or was it a little more volatile, how that go [indiscernible]

Our booking was pretty linear, obviously increasing. And whether you look at it on a 4-week trail, 13-week trail, you looked at the actual just weekly bookings, it was a pretty linear progression throughout the quarter. Obviously, stronger on the industrial side, as we've talked about and probably a little bit weaker on the auto side, given what we've talked about previously, but pretty steady.

Another one of your competitors talked about the automotive...

I got to get on this first, so you can't compare me to everybody.

That's kind of the object of the conference. We're happy to put you on any time you want. So they mentioned that while the automotive order rates to the semis are down, like the end demand for autos is still pretty good, and they're just working through some inventory. Is that pretty much concurrent with what you guys see out there? And any guess as to when the automotive supply chain will be through digesting the inventory.

It's interesting. If I use what we see in our business, we never got as far out of place on inventory in automotive as maybe our other end markets. but also with what we've seen in the area where we continue to see some inventory burn, which had an impact on us was the BMS part of our auto business. But if you look across the rest of our business, I don't think other than this correction for the anomaly in the pull-in, I don't think there's still a big inventory burn there. And an important part of that auto story for us is the continued content gain, right? Because if you look at our business over -- pick it a 10-year or 5-year window, our auto business outgrows SAAR by low double digits. So -- and what's interesting, and you probably all see this, anybody who's bought a car recently whether it's a high-priced car, low or medium, there's more and more content. And so with our leading positions in connectivity, whether it's A2B or GMSL, functionally safe power. All of this in-cabin immersive experience, the Level 2 ADAS that's being pushed into cars, those are all real content gains for us. And so that 10% content gain that we got over a 10-year period. If you actually bifurcate that and look at the last 5 years, it's actually almost a 15% spread. Now it's a combination of content gain and some share gain, but a big piece of that is the content gain because we're continuing to see more sensor modalities and more microphones, cameras, speakers, et cetera, in cars that need connectivity and functionally safe power. So I think that positions us well in that market.

Got it. Yes. Just to touch on the industrial revenue. I mean it's really -- it's bouncing back pretty hard for everybody, but in particular, for Analog Devices, but this is a fairly common theme we've heard throughout the conference. Why do you think industrial is coming back so strong? Do you think it's just because for most folks, it was down 40-something percent, and we have to do some inventory replenishment. Has demand gotten a little bit better, some combination, something else out there. What's your sense as to why it's been so good. And you said it was stil 30%?

On a trailing 12-month basis, industrial is still 30% below our peak. I do think an element of this is it was the most severe inventory correction we've ever seen, which -- and it lasted longer than we've typically seen a correction. And I think companies leaned out their balance sheets. But as the industrial piece starts to pick up. Now look, the macro signals are still mixed around industrial. But the build for the rebound for us has been pretty strong. And I think that the inventory treatment has varied by customer, by vendor, end by end market, which is a little bit of that choppiness that we're seeing -- but I still think the majority of that is because of the severity of the inventory overshipped during that run up after the supply change breakage.

Because your industrial business has bounced back so hard, has there been any change in lead times of any of the products? Have you started to run out of anything out there?

So we're -- the majority of our products are still running lead times under 13 weeks. Vince talked about on the call that we had some longer lead times in a few spots, particularly in aerospace and defense, which we expect will get corrected over the next quarter. But otherwise, we haven't seen any significant deterioration in our lead times. I think in a few of the high runners, maybe in ATE, we might be a little bit longer than 13 weeks on some of the parts, but the majority of our parts are under 13-week lead times, which is it's great. It's also one of those limiting things from a visibility perspective for us because we are at 13 weeks.

Yes. We'll get the visibility in a second. One of the things that Vince did talk about was this macro uncertainty, and you mentioned it. Can you guys just define that a little bit? Is it just the whole tariff thing? Is it what you're hearing from your customers, what you're reading in the paper, all of the above?

So it's -- I'd say a couple of ways. And it's uncertainty both ways because it's the tariff and trade uncertainty. And for us, and we've talked about this before, the tariff and trade uncertainty is less about the direct impact to us, right? The impact of tariffs as they exist today is pretty nominal for us. But what it does matter is what is it doing to GDP and what is it doing to demand creation/demand destruction because our products are in a lot of end markets where there are tariffs already and does that drive down demand? And what does that do to GDP? So that's certainly an uncertainty, and that clouds the picture because two of the largest economies in the world, they're still in negotiations with our administration around the trade policies, right? So we still don't yet know where China and India will land on the spectrum. We've still got some potential even additional tariffs in our space specifically to come, right? So I think that's a level of uncertainty. Second piece, I mentioned a little bit, if you look at which for us, industrial this is a really good barometer for us. the PMIs have been choppy, right? They're hovering around 50, but we've had a couple of months of contractionary PMI. So you got to pay attention to that because it does -- has historically been a leading indicator for where we're headed. The other piece is uncertainty around SAAR, right? The number of vehicles are going to be produced. You look at the pressure, the rebates being removed in the U.S., the tariffs and the impact they're having on auto demand. And it's unclear what auto production plans might look like in '26. Now I feel good that we'll be able to get more than whatever SAAR is because of content. But we still don't have a good look in SAAR. So those are some of the things from a challenging macro perspective. The flip side is, given some of the other macro data and the pressure that's now on the Fed, we might see rate decreases, which the market has been pricing in a little bit, and there's a lot of anticipation for that, that could be positive. And if we can solve in the next 3 months, or between now and the end of the year, the remaining tariff things, getting some certainty will help us better shape the outlook for '26 broadly across our industry and our customers' industries.

If we look at auto versus industrial longer term, which end market for ADI do you think will grow faster, let's say, over the next like 3, 5, 10 years?

It's a great question. I mean industrial is the core of our business. And it is our most powerful franchise. And I think if you look at some of the continuing opportunities there where we see growth, whether it's the AI driven, whether it is the trend in automation and robotics, I think we'll continue to grow very strongly on the industrial side.

Okay. Great. And then in terms of geography, there's this whole China for China fear. Well, the last I checked, that's been around for like 25 years since I got into the business. How does that impact ADI, if any? And how is your China business trended this year?

Our China business has trended strong. It was the first into the downturn for us. It was the first out, and it has grown across all of the markets.

It's been your strongest [ this year ].

Very dominant from a growth perspective on the auto side. But now more broadly, as the year progressed, all of the markets in China are growing. But that's also an interesting point for us is we're still below peaks in all of the end markets in China, except for auto and well below at least 30% below in each of the other ones. Auto has been super strong, but we're still well below peak in the others. And the competition there is strong, but we continue to deliver and win there. And look, we do a lot of those things, right? We have a design team in China that designs in China for China. We do have some small manufacturing through a partner in China. But it is a -- what we do today from a China perspective is a very low percentage is actually manufactured in China. But from a performance perspective, where they need the performance products and they still need analog, they're still buying from us. Even in places where they've tried to push and get locals at the high performance and we're still winning. So I think that's an important differentiator for us as we tend to play more in the high performance and less in the good enough sort of low ASP area. The low ASP bands are not big part of our business.

You guys are thankful or not there. We -- just to dig in a little bit on the auto space. Your industrial business has basically done the Statue of Liberty move this year. How is the auto business trended? And then I just wanted to clarify, have the pull-ins, have they been all in the auto business? Or has it been in other businesses?

So we have not seen that -- look, it's impossible to be perfectly precise.

Your crystal ball is way better than mine. So I...

Well, and people don't call and tell us they're pulling in orders. But we saw pretty clear signs both in our data when it was around bookings and what we were hearing from our field teams around the pull-ins in auto. And you could see we overachieved in Q2 in 2 regions, in auto that we didn't expect, which was the U.S. and Europe. And then we over -- China has been strong, and we weren't expecting it to be as strong in the third quarter. So that was confirmatory evidence to what we heard, and we do think that sorts itself out here in the fourth quarter. But overall, it continues to be a very strong growth market for us. We feel very -- like we're very well positioned. We had -- and if you want to think out more medium, long term, we had record design wins in China in '25, and we continue to see increased design wins in China, again -- sorry, record designs of '24 and increases in -- and so we feel like we're very well positioned there in the market broadly, and we like the growth trend we're seeing there.

Okay. And with the business getting better, how has your visibility changed? Are you seeing like -- are you allocating for like less turns in general? Have you seen your turns business increase and has your visibility changed at all for, say, 3, 6 or 9 months versus last quarter, the quarter before.

So I would say visibility hasn't really changed much for us. We're probably -- because of the relatively short lead times or in-quarter lead times, visibility is still largely out of the quarter. Do we have some order book in backlog that's beyond the quarter out? Yes, enough to give a concise point of view on where a quarter beyond where we are now. We just don't have that kind of data given the short lead times and the way customers order. And then what was your second part of the question?

Just about backlog.

Yes. So we do have some backlog in, but we've -- one of the trends we've seen overall at the company is last 3 quarters, we've seen increasing backlog.

Yes. Yes, right. One question is pricing. So there's been some reports of one of your larger competitors raising pricing. Are you guys raising pricing, too? Is this an opportunity to gain share? What does that mean for ADI?

So I won't comment on what my competitors are doing. What we've said and Vince actually said it again on the call is pricing for us has been pretty stable, right? We had a lot of price increase in '22 and '23, '24 and '25 have been pretty stable from a pricing perspective. That said, we've invested pretty significantly in resiliency in our hybrid manufacturing process, which comes with a cost. Also broadly, many of the inputs are inflationary. So we continue to track and monitor that and the market to evaluate whether we should alter our pricing. So we will continue to watch that. But right now, the forecast is for stable pricing.

And how are you guys treating your own inventory and your own utilization rate plans? And I think right now, you're 50-50 in-source versus outsource manufacturing.

Yes, we are about split half internal, external. From our inventory perspective, and I started talking about this a few quarters ago, maybe it might have been 4 quarters ago that we would start to build back some -- after very aggressively taking inventory off our balance sheet. We started to build back some of that so that we have inventory available to capture what is turning out for us to be the cyclical upturn. So we are doing that. Now you see our -- because of the revenue growth, our days are coming down, but we still put another $70 million of inventory. And we're trying to capture as much of that at the die bank level to give us more flexibility going forward as we see the growth. We are continuing to run our channel very light, well below our historical levels, and we are continuing to be able to meet the service obligations as is our channel partners. But if we continue to see growth there, we will likely need to have some more inventory in the channel.

Can you give us a sense of ADI's inventory now and what the goal or the target is?

So the -- currently, we're running under 6 weeks. And I think that we probably -- we will need over the longer growth period to get back probably closer to something 6 weeks or 6 weeks-plus. But I don't see us getting much higher than that given what we've done on the back end because our back-end cycle time is about 6 weeks.

Are there any plans to change that 50-50 mix, by the way, in terms of internal and outsourced manufacturing.

Not right now.

And any difficulty getting any wafers given the increase in sales? Or can you guys pretty much get you need on the [ fabs ]?

We have not had any of -- any kind of challenges with wafer supply.

And how about I ask every company this because it's obviously in the news there seems to be a move to get more manufacturing in the U.S. by the semiconductor companies. I'm sure you've heard about that. how does that impact ADI? Does it impact ADI?

We already have a pretty substantial portion of our manufacturing in the U.S. So if you think about our manufacturing footprint, we've got 2 factories on the West Coast in Washington and Oregon. And in fact, when we talk about the resiliency build that we were doing, a big part of that investment was in our Oregon fab. So we've got significant manufacturing in the West Coast, and then we've got 2 manufacturing locations here on the East Coast, specifically in Massachusetts. And then you guys know the rest of the story. We've got manufacturing in Ireland, and then we've got a back-end spread across a number of facilities in Asia. And so if you think about the push for domestic, we are already building pretty significantly. In addition, we continue to expand not just in manufacturing, but our R&D presence. We're adding design centers in the U.S. And these are all the things that the administration is looking for, right? Because the design leads to more manufacturing and more things happening in the states. So we feel like our hybrid model and our global diversity positions us pretty well.

Yes so I would be remiss if I didn't start asking a CFO up here about cash and all that fun stuff. But first, I want to take a bit of a step back. You guys have been very successful in M&A. This is pre rich days, but starting with Linear and then with Maxim. I remember when you guys first bought Maxim, I think it was 5, 6 years ago, you talked about synergies from a cost side, which I would assume are all done, but also from a revenue side. We haven't talked about that in a while. Any update on those?

So when we talked about what we said at the time of the acquisition is by '27, we'd have about $1 billion worth of revenue synergies out of the Maxim deal. So '24 we -- and if you think about the typical design in life cycle, it was going to take us a few years to get there. '24, we had tens of million dollars of what we would have -- we called synergies. '25, we will have hundreds of millions, and we are on track to hit the $1 billion. And so if you think about -- so what are some of those synergies? GMSL which has been one of our high growth -- very high-growth products, one of the key synergies that came from that deal.

The other is if you think about some of the things we've talked about in the wins in the consumer space where you combine Maxim low-power features with ADI's ability to do vital signs monitoring and sensing and how that's impacted our ability to sell in the hearables and wearables space. Some of the Maxim power is helping us do the things we're doing in the data center. So we're -- across a number of portfolios -- parts of our portfolio, we're seeing those synergies come through. And literally, my team and I meet quarterly review where we are against the $1 billion, and we are on track for that $1 billion.

In '27.

'27.

Great. And then can you just refresh us on the long-term margin targets for ADI and then the, I guess, the portion of the gross margin leverage you get from mix utilization rates, et cetera, et cetera?

Sure. So when my predecessors put out the model, the operating margin number was for, I believe, it was 42% to 50%. And the gross margin was we would try to stay above a [ 70 floor ]. As we know was a challenge during the downturn, although I felt pretty good where we were able to hold given the severity of the downturn. And as we talked about on the call, we're guiding getting back to 70% in our fourth quarter. And there's a couple of drivers there, particularly if you think about the gross margin line, where we get a ton of leverage, it's our mix and it's the utilization and what it does to our variance accounting. Think about the mix, if you take our guide for Q4 industrial, we would end with that guide at about a 40% -- 49% industrial mix for the quarter and maybe 46-ish for the year, which is still well below our peaks when we were at our highest profitability. I think the industrial is more like 53% of our business. But the increase in industrial for us is gross margin accretive. The other thing is just the pure volume increase and the utilization improvements, driving down better absorption in our internal factories, which we're seeing both if you go back to the peak and where we dropped to in the trough, it was roughly half, half each, half was utilization-driven half a is mix driven. So as the mix rebounds and utilization rebounds, we continue to see upside gross margin opportunity.

Great. So yes, here we are kind of bouncing off the bottom and you guys still generate a ton of cash.

35% cash flow margin.

For those of you keeping score at home. What are the plans to deploy the cash? And then could we see more M&A given the success you guys have had previously?

So our what we've told our investors is we will return over the long term, post maximum over the long term, 100% of our free cash flow to shareholders. And we are on a path to do that. And the way we allocate that, it's roughly 40% to 60% of our free cash flow goes for our dividend, which for those of you paying attention, we've increased again this year for our 21st straight year of increasing dividends and then the residual we will use to retire shares. And you saw a pretty aggressive step up in share retirement and buybacks in the third quarter. And that's a planned activity. We tend not to buy as much back during our second quarter, given the dynamics in that quarter. So we will continue to do that.

The other thing that you and I talked about this when we were chatting yesterday, we did make an opportunistic -- do an opportunistic bond offering earlier this year. The markets were very constructive, and we were able to actually do a really good deal to essentially prefund our next 2 maturities in our debt tower. Not that different from what we did months after I started originally, we did a bond offering to retire the 2 tranches we just retired late '24, early '25. So market was favorable, gave us an opportunity to derisk it. So that's a little bit why we have a bigger gross cash number than we've had in the past is capturing that. It's on our balance sheet. Fortunately, we're able to invest that at yields as a pretty neutral cost having done that. So that's a good thing.

On the M&A front, look, we are very satisfied. Vince says the same thing, very satisfied with our analog mixed signal and power portfolios. We are continuing to aggressively invest internally in software and digital, and we continue in AI, and we continue to look for opportunities there. So there are -- anywhere we can find something that can help us solve a customer problem, accelerate time to market with a solution, we're looking at those types of transactions. So we will continue to look at that.

Great. And then since I have the CFO, touch on and depreciation over the next few years?

So obviously, we went through a significant resiliency campaign as we were building out our hybrid model, and we spent about $3 billion on CapEx between '22 and '24 to build out that resiliency and also to cross qualify our products internally and externally and to make sure we had resilient supply chain outside of China. So that work is largely complete. Some of the resiliency will get fully completed when we get our capacity online with TSMC in Japan, which will be really important. We'll be able to do 95% of our manufacturing of product outside of China and Taiwan.

That's 2 years from now?

Yes. So that was really important. Now we've also said we're getting back on our long-term model, which, for us, we're historically CapEx light. That means 4% to 6% of our revenue dollars will go to CapEx. We're tracking to that 4% to 6% for '25, which is another reduction from where we were in '24 and '24 was a very significant reduction from '23. Now what that has done, as you guys are all great at math is that resiliency campaign increases the level of revenue we need to get back to the margins we saw in the earlier peaks right? Roughly you guys could go figure out $30 million in average depreciation life. It's at least 150 bps a headwind from a depreciation perspective coming through from resiliency campaign.

When does depreciation peak for ADI?

It's a great question. I don't know the answer when it peaks.

Okay. Last question. Would it ever make sense for you guys to do your own 300-millimeter fab? Or because you outsource 50%, is that...

We have incredibly strong partnerships, which gives us confidence that we don't need to do that. It's also an incredibly expensive and incredibly CapEx-heavy process. I am quite happy to use my partners capital.

Got it. Great. We're out of time. Thanks, Rich.

Thanks, Chris.