Analog Devices (ADI) Q3 2026 Earnings Call Transcript

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DATE

Wednesday, Aug. 19, 2026 at 10:00 a.m. ET

CALL PARTICIPANTS

• Chief Executive Officer and Chair - Vincent T. Roche
• Chief Financial Officer - Richard Puccio
• Senior Director, Investor Relations - Jeff Ambrosi

TAKEAWAYS

• Revenue -- $4.02 billion, up 40% year over year driven by broad-based demand across industrial, automotive, and communications end markets.
• Adjusted Gross Margin -- 72.5%, up 33 basis points year over year reflecting favorable product mix and higher manufacturing utilization.
• Adjusted Operating Margin -- 50.0%, up 780 basis points year over year due to improved gross margins and execution discipline.
• Adjusted EPS -- $3.45, up 68% year over year and finishing at the high end of the company's previous outlook.
• Industrial Revenue -- $1.97 billion, up 53% year over year led by automated test equipment, aerospace, and defense.
• Automotive Revenue -- $998 million, up 16% year over year behind content gains in electric powertrains and next-generation driver assistance systems.
• Communications Revenue -- $655 million, up 84% year over year driven by accelerating data center demand.
• Consumer Revenue -- $397 million, up 6% year over year reflecting strength in high-end smartphones and prosumer equipment despite memory-related challenges.
• Data Center Concentration -- 80% of communications revenue, reflecting the transition of the business toward AI infrastructure.
• Optical and Power Growth -- Exceeding 100% year over year within the data center segment due to increasing demand for high-performance connectivity.
• Energy Business Scale -- $500 million plus, benefiting from investments in grid monitoring and battery management technology.
• Empower Acquisition -- $1.5 billion all-cash transaction completed on July 7, 2026, to strengthen the company's power management portfolio for AI processors.
• Optical Circuit Switching Revenue -- Poised to approximately double this fiscal year based on current design wins and customer commitments.
• AI and ATE Exposure -- 20% of total revenue, representing the combined contribution of data center infrastructure and automated test equipment.
• Maxon Synergies -- $700 million expected in 2026, with a target of $1 billion in 2027 following the strategic integration of the acquisition.
• Shareholder Returns -- $1.7 billion in the third quarter through dividends and share repurchases, maintaining a target of 100% long-term free cash flow return.
• Free Cash Flow -- $4.9 billion on a trailing 12-month basis, representing 36% of total revenue.
• Inventory -- Increased $83 million sequentially to a record level as management builds strategic die banks to support accelerating demand.
• Q4 Revenue Guidance -- $4.3 billion, plus or minus $100 million, representing continued sequential growth.
• Q4 Adjusted EPS Guidance -- $3.86, plus or minus $0.15, supported by higher expected operating margins.
• Q4 Operating Margin Guidance -- 52%, plus or minus 100 basis points, driven by higher revenue absorption and favorable mix.
• Addressable Market Expansion -- 2030 data center and energy serviceable addressable market more than doubled from estimates provided 1 year ago.
• Power Density Innovation -- 800-volt DC power distribution conversion technology delivering 20 kilowatts at densities exceeding 2.5 kilowatts per cubic inch.
• Manufacturing Agility -- Days of inventory declined to 156 and channel weeks fell below the 6 to 7 weeks target despite record inventory levels.
• Net Leverage -- Ratio of 0.9, reflecting the financing of the Empower acquisition while maintaining a strong balance sheet.

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RISKS

• Puccio stated, "Inflation is still a persistent factor," noting that the company expects further cost increases to impact the business.
• Roche stated, "There is heightened geopolitical risk and rate hikes," which contribute to volatility in the global financial markets.

SUMMARY

Management reported that data center capacity is now measured in gigawatts, necessitating a grid-to-chip system-level approach. The company indicated that power availability serves as the primary constraint to AI expansion, driving demand for specialized sensing, power management, and optical connectivity. According to the call, the company is utilizing its hybrid manufacturing network to respond to demand while maintaining long-term targets for shareholder returns. Management noted that investments in internal capacity and external partnerships are being coordinated to support expected industry growth through the end of the decade.

• Roche stated, "Power availability has become the primary constraint to further AI progress."
• Management reported that the acquisition of Empower allows for power delivery within the processor package, potentially reducing energy consumption by 10% to 15%.
• Puccio noted that customer inventory levels remain lean, with management observing no current signs of restocking activity.
• The company is targeting an 800-volt DC power distribution transition to address increasing density demands in AI clusters.
• Roche indicated that the serviceable addressable market for data centers and energy in 2030 is now estimated at double the projections from 1 year ago.
• Roche noted that the emerging phase of AI will extend from data centers to the physical world, stating that "pervasive robotics, digital health, [and] autonomous mobility" will drive future demand.

INDUSTRY GLOSSARY

• ATE: Automated Test Equipment, used for semiconductor validation and testing.
• OCS: Optical Circuit Switching, a technology for routing optical signals in data centers.
• CPO: Co-packaged Optics, an architecture that integrates optical components directly with processors.
• SAAR: Seasonally Adjusted Annual Rate, a measure used to track automotive production trends.
• SAM: Serviceable Addressable Market, the portion of the market a company can specifically serve.
• TAM: Total Addressable Market, the overall revenue opportunity available for a product or service.
• IC: Integrated Circuit, an assembly of electronic components on a single semiconductor chip.
• MEMS: Microelectromechanical Systems, technology used for microscopic sensors such as accelerometers and gyroscopes.
• BOM: Bill of Materials, the list of components and costs required to manufacture a product.
• bps: Basis points, a unit of measure for interest rates and percentages equal to one one-hundredth of a percent.

Full Conference Call Transcript

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

Jeff Ambrosi: Thank you, Danny, and good morning, everybody. Thank you for joining our third quarter fiscal 26 conference call. Joining me today are ADI CEO and Chair, Vincent T. Roche, and ADI 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 are about to discuss includes forward-looking statements which are subject to certain risks and uncertainties as further described in our earnings release, periodic reports, 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 CEO and chair, Vincent T. Roche.

Vincent T. Roche: Thank you, Jeff, and a very good morning to you all. Well, as you have seen, third quarter revenue, margin and 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 will focus on how we are helping customers meet an 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 1 of the most defining challenges of the AI era. Power availability has become the primary constraint to further AI progress. Solving this challenge more than simply adding more energy, however, it demands a grid-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 1 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, improve ROI. Expanding 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 localizing power will augment our $500 million plus energy business which began inflecting in 2025, and has been 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 makes 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 are 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 have been setting and extending the industry performance envelope for decades. Today, the complexity, of efficiently moving data at ever higher speeds within and between racks. 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 further increase the amount of optical lanes, signal bandwidth, or both, to accelerate network speeds from 800 Gb to 3.2 Tb per second. We believe that we are very well positioned to benefit 3-fold. 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, gain 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 are targeting a similar level of growth in 2027. In the nascent CPO space, which we view as a SEM expander, 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 1 of those differentiators in context, a 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 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 are seeing a significant design-in 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 1 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 thousand 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 GW data center. As with optical, our power pipeline is growing rapidly, and the direction and rate of our R and 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 shift 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 SAM 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. Stepping back to frame this growth on the larger landscape of ADI's continued evolution, grid to chip, is but 1 facet of the 1st generation of AI.

Characterized by applications largely focused on data centers. The ATE growth we have recently spoken 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 2nd 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 based reasoning, informed by deep physical intelligence, will extend our AI value proposition across the entire addressable space. We are 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 Richard.

Richard C. Puccio Jr.: Thank you, Vincent, 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 ADAS, 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 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 33 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%, is up 100 basis points sequentially and 780 basis points year over year driven by improved gross margin and execution discipline. Non operating 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. I would 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 point 9. We increased inventory $83 million sequentially as we continue to build strategic dive 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 $600 million 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 a record $4.9 billion or 36% of revenue. Over that same period, 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 a 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 endpoints, adjusted EPS is expected to be $3.86 ±$0.15. In closing, our record results and outlook underscore our ability 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 will give it back to Jeff for Q&A.

Jeff Ambrosi: Thank you, Richard. Now let's get to our Q&A session. We ask that you limit yourself to 1 question in order to allow additional participants on the call this morning. If you have a follow-up, please re queue and we will take your question if time allows. With that, operator, can we have our first question, please?

Operator: If your question has been answered and you wish to be removed from the queue, Our first question comes from Harlan Sur with JPMorgan. Your line is open.

Harlan Sur: Good morning and congratulations on the continued solid execution On the strong operating margin guidance and therefore strong implied gross margins, I am sort of rolling up to about 73.5% gross margin for October, a 100-basis-point improvement. Your utilizations are already at high levels. You have talked about mix in volume. As the primary drivers going forward. Are these 2 dynamics driving most of the 100-plus-basis-point step up in gross margins in October, or is 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.

Richard C. Puccio Jr.: Thanks for the question, Harlan. I will take this 1. So, you know, as we described for Q3, gross margin came in as expected. We are actually expecting a gross margin increase of about a 150-bps to about 74% and you were 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 would remind you that we do have a seasonal shutdown coming up in our first quarter, which does create some drag on gross margin and we are expecting more cost in increases coming. You know, 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 gross margin hanging in at the Q4 exit level. As long as we maintain the revenue and mix that we expect.

Jeff Ambrosi: Thank you, Harlan. We will move to our next question, please.

Operator: Thank you. Our next question comes from Vivek Arya with Bank of America Securities. Your line is open.

Vivek Arya: Thanks for taking my question. Vincent, I am very interested to hear your thoughts about fiscal 2027. If I look over the last 2 years, ADI's top line has accelerated, I think, almost every quarter on an year-on-year basis. And how much of that do you think has been kind of secular? How much of that has been cyclical? How much of that has been pricing? And if I were to just take your Q4 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 constraints?

And if I could sneak in something related to that, is there more operating leverage left if indeed your top line were to grow 20%? Thank you.

Vincent T. Roche: We will take the rest of the call, Vivek, to answer those questions. So what I will say is let me unpack a little bit of the story and then Richard can add some of his own commentary as well. So, you know, since we called the in the second quarter of 24, we have seen our particular strengths manifest through the following kind of areas. So we are clearly a beneficiary of the defense and the AI supercycles, which I think will persist for many, many years to come.

You know, who knows what the trajectories will look like, but you know, the right now, the aerospace and defense the APE and data center businesses, they are about 30% of ADI. And their portfolio is exposed and, I think, poised for greater growth and more content and more share gains. Although, of course, we are gaining share right across the spectrum of the car types--the combustion as well as EVs. Also in consumer, you know, we turned the corner in consumer 2 or 3 years ago, and we are 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 have mentioned several times before as well, the Maxon synergies. So we had said our expectation when we announced the acquisition of that we would generate a billion dollars worth of synergies while we are well on track. We will generate about $700 million this year. And I expect that we will hit a billion plus in 2027 as well. So, you know, 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, you know, all the bolts aside from the, the asymmetric tailwinds that we have, And as rich talked a little bit about as well, the we have got a very favorable backdrop in terms of pricing. And so I think we have 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, you know, 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 is thanks to the manufacturing agility that we have built in with our hybrid model and that we continue to extend the score. So, Richard, maybe you will want to add a little more color.

Richard C. Puccio Jr.: Yeah. I guess, Vivek, what I would add is, you know, as we have been talking about this, the inventory position, the important piece to consider is you know, with the significant demand we are 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 you know, 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 is still a lot of opportunity. And then if you look at where we are from a from a consumption pattern, as Vincent described, those 3, 3 big secular drivers that are specific to our business, you know, we can see real end demand. Right? We are seeing the massive increase in AI infrastructure spend. We are 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 are 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.

Vincent T. Roche: So I think in summary, you know, we are we believe we are very, very well positioned as a company. But, you know, I think the things that are under our control, I think we are executing well on. But there is a lot of things that can happen with the macro. there is heightened geopolitical risk. And rate hikes, of course. there is a lot of volatility as we all know in the financial markets. Perhaps AI CapEx could slow or decrease. But all that said, our expectation is that we will have a brisk growth year in 2027.

Jeff Ambrosi: Alright. Thank you, Vivek. We will move to our next caller, please.

Operator: Thank you. Our next question comes from Stacy Rasgon with Bernstein Research. Your line is open.

Stacy Rasgon: Hi, guys. Thanks for taking my question. On the data center side, I you said that 80% of your comms business was now data center. Which I found interesting. And, I mean, that data center piece is I know it is doubling. Know, ish growing 100%. Is that the kind of growth rate I ought to be thinking about now for at least the comm segment next year, 2027, given the vast majority of it is data center. Do you think that comm segments should be growing, you know, close to 100% year-over-year as I start to think about 2027.

I guess maybe within that question, if you could give us any color on what you are expecting for the segments, at least in the near term, into Q4, that would be helpful as well.

Richard C. Puccio Jr.: Yes. Stacy, maybe we will start with the near term stuff and kind of the end market outlook. And then we can maybe pass it to Vincent for the AI Outlook or the data center. Great. Thank you. Who would this be? Yeah. So yeah. I guess I can take that 1. So, basically, at the midpoint of our outlook, you know, we are expecting industrial to be up high single digits Communications lead the growth, obviously, led by data center up about 10%, consumer up high single digits, and automotive to be up low single digits.

Operator: And then as for the growth and kinda how to model data center, which is basically your question on a on a longer term basis, You know, at a high level, there is many growth vectors.

Vincent T. Roche: You know, first of all, the market's strong. The end market's growing double digits. If you look at CapEx, what have you, then importantly, as Vincent talked to you on his call, right, the analog content increasing significantly, particularly as we transition to 800 volts, etcetera. And, obviously, we are the investments we are making, we are targeting to increase share in a lot of Right? So at a high level, we expect strength in data center for multiple years to come. Yeah. So I think, Stacy, rather than give you a number for, you know, 2027, You know, we are almost 2x on a pace to 2x in 2026.

And my sense is that we will 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 $500 million revenue for ADI. I think by the end of the decade, that business will double.

Jeff Ambrosi: K. Stacy? We will move to our next question, please.

Operator: Thank you. Our next question comes from Tore Svanberg with Stifel. Your line is open.

Tore Svanberg: Yes, thank you. Vincent, I had a bit of a longer term question for you as it relates to analog. So I mean, it is industry that historically has grown high single digits. But with analog now benefiting, you know, significantly more from AI infrastructure and then to your point, eventually also from physical AI, Should we assume that the underlying growth of the analog industry is clearly shifting upwards here. Both from a units and a pricing perspective? Thank you.

Vincent T. Roche: Yeah. I think it is. Tore, thanks for the question. You know, I think it is possible for the analog business to be in the double digit zone compounded for several years to come. And you know, you just look at data center alone. If I just take data center, you know, there is expected to be 100 GW-equivalent in you know, infrastructure built for data centers between now and kind of 2031. Each gigawatt generates $1 billion to $1.5 billion analog SAM. And the problems are becoming more complicated in data centers, so you know, it is going to increase the sophistication and the pricing capabilities of the solution. So yeah, my sense is it is not unreasonable.

You know, 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%. You know, we are we are contemplating something higher in the out years from here.

Jeff Ambrosi: Thank you so much. Thank you.

Operator: Our next comes from Mark Lipacis with Evercore. Your line is open.

Analyst: Hi, great. Thanks for taking my And maybe if I could follow-up on that. And Vincent, thanks for, putting a number out there and a double digit range. The last the last time ADI revenues were above that long-term 5-7% trend line, was, you know, back in the late nineties to your early 2000s. And there were, know, similar arguments being made about know, the build out of the Internet and, you know, there is telecom deregulation.

I am wondering, Vincent, if you could if you could just you know, go back in time and compare know, what is the difference between, you know, the secular dynamics you see today and what you know, many people saw back then, which ends up bringing analog, revenues, not just yours, but the industry back down to that 5% to 7%. Thank you.

Vincent T. Roche: Yeah. I think first off, because I looked through that myself, the concentration was much you know, was quite high at the time. What I am seeing now mean, if you look at the industry in 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 is increased. Think just the SAM the TAM and the SAM for the analog sector with every bit of information that is been processed, the value of that content has increased. With every bit, with every watt.

And know, so what we are seeing on 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 have built into this company's business model is optionality. We get to we get to pick where the markets choose us, 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 is broader. it is deeper. Analog is much, much more important.

And, you know, the whole we think over the next 25, 50 years, a lot of economic growth is gonna 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 have got this gravity field irrespective of what might happen from a cyclical perspective, you know, in the in the coming years. My sense is we have never ever had a cycle like we have now got. Just it is breadth, its depth, and this gravity field of AI to pull it along.

Jeff Ambrosi: Thank you, Mark. Appreciate the thoughts. We will take our next question, please.

Operator: Thank you. Our next question comes from Blayne Curtis with Jeff. Your line is open.

Analyst: Hey, good morning, guys. Thanks for taking my question. I wanted to ask, just going back to the data center, but I guess you in the past referred to AI exposure that includes ATE. I was 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 do not know if you are willing to break out how big that was.

Richard C. Puccio Jr.: Yeah, Blayne. So in the in the past, you are right. We have talked about this AI exposure as ATE plus our data center business combined. Those are 20% of ADI. You know, without giving numbers for forward, you know, years of growth. I mean, I think clearly, we have got a lot of confidence, which importantly is backed up by our design and activity. Right? it is 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? You heard Vincent 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 is multiyear. Right? And that is and again, that is confidence because of our design activity because of our backlog, our pipeline, and the bookings momentum.

Jeff Ambrosi: Okay. Thank you. Thanks, Blayne. We will take our next question, please.

Operator: Thank you. Our next question comes from Matthew Prisco with Cantor. Your line is open.

Matthew Prisco: Yes, guys. Thanks for taking the question. So 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 tick higher? At what point do we need to start thinking about capacity additions? And are there any constraints arising in supply chain today or any areas that you see potential pressure in as we move forward? Thank you.

Richard C. Puccio Jr.: Yeah. Well, clearly, Richard, Yeah. Sure. I will start, Matthew, and then Vincent maybe can talk some more about the longer term piece. But you know, from our perspective, we really are executing well from a supply chain. As we have talked about, we have been able to deliver above seasonal growth for 9 straight quarters. And we are guiding to a 10th. We are continuing to build inventory, reflecting our ability to expand our internal capacity as we have talked about. We continue to install new tools in available spaces as we are and we are also getting more wafers externally.

So we have we feel like we are very, very well positioned for the for the near and medium term demand. And, obviously, across the industry, there is some soft spots, and, lead times have started to extend. But we are working really hard to keep them keep them in check. Obviously, this demand acceleration is pretty unprecedented in recent memory, but you know, we are we think we are very well positioned. You know, we have a book to bill as we have talked about that is above 1. Or not in that sort of unusually high space from a book to bill perspective. You know, we are also and this helps us from a manufacturing efficiency perspective.

Are getting a bit better visibility You know, 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, like, we are we feel like we are in a good position. We do continue to add capacity as we go, And then, you know, and I will I will give my 2 cents. You know, we are scenario planning what the world could look like for if this kinda 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 are already doing and have been doing for the last 3 to 4 years.

Vincent T. Roche: Yeah. 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 ends and back ends. So we are, 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 you know, the lithographically insensitive nodes, if you like, kind of 6 micrometers that kind of level right down to 5 nanometers and 3 nanometers.

So that is what we did during the COVID cycle, just that we continued to extend the capability of that hybrid manufacturing system that is our strategy going ahead. And, you know, just remember a couple of years ago, it was expected that the semi industry in totality might reach $1 trillion by 2030. Well, that is kind of in the wake at this point. And we are 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.

Jeff Ambrosi: Thank you.

Operator: We will take our last question, please. Thank you. And our last question comes from Joshua Buchalter with TD Cowen. Your line is open.

Joshua Buchalter: Hey, guys. Congratulations on the very strong results and guidance. Thanks for squeezing me in. The 74% gross-margin outlook, you know, is pretty staggering, and we are back to those 2022 peak levels. it is also coming without all that much incremental utilization torque. 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 are prioritizing revenue growth versus margins if you are? Like, is this low- to mid-70% level 1 that you intend to manage to long term, I guess? Thank you.

Richard C. Puccio Jr.: Sure. So I do think as a previously mentioned, Joshua, we can continue to grow, let's say, continue to maintain that sort of roughly 74% level. And we will continue to focus, and I said this in the in the last call, we will continue to on growth investments. Which some of them may put some pressure on margins as we expand revenue growth dollars. 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 upcycle.

So you know, we feel pretty good. We are going to balance the investments we need to make to grow with maintaining that you know, relatively maintaining that margin. I said this last quarter, and I will repeat it here. I do not think, for instance, there is a ton of room to get more margin accretion out of utilization. But we are you know, we are still only in a 49% industrial mix, So if the mix shifts, there is 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 will we will continue to monitor and track and focus on that as we have historically, but I do think we are in a pretty balanced position for the medium and long term here.

Vincent T. Roche: Yeah. I think just 1 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, you know, the cycles help get the efficiencies in manufacturing and some support. So those 2 things. 1 is obviously very strategic, 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 has positioned us well to continue to make that you know, that early stage, the origin of the gross margin a continuing critical part of ADI's value proposition.

Joshua Buchalter: Thank you both, and congrats again.

Jeff Ambrosi: Thank you. Thanks, Joshua.

Operator: Thank you. This concludes the question and answer session. I would now like to turn it back to Jeff Ambrosi for closing remarks.

Jeff Ambrosi: 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.

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