Analog Devices, Inc. (ADI) Earnings

Management highlights

- Overall Company Performance & Strategy * Second quarter revenue, profitability, and EPS all finished above the high end of guidance, hitting new all-time records for revenue and earnings * Record demand is being met by the company's dynamic hybrid manufacturing model, which gained enhanced scale and supply chain optionality from years of prior investments, enabling the firm to capture upside from demand surges * Core strategic focus areas are AI-driven computing and connectivity, autonomy, proactive healthcare, sustainable energy transition, and immersive consumer experiences, supported by ongoing robust R&D investment across analog, digital, software, and AI * The company plans to acquire Empower Semiconductor (MPower) to add cutting-edge integrated voltage regulator (IVR) technology and silicon capacitors, completing ADI's comprehensive grid-to-core power platform - Industrial Segment (Beyond ATE/Aerospace & Defense) * Collective revenue from non-AE/non-aerospace industrial sub-segments (automation, ETM, energy, healthcare, broad market) grew over 40% in the first half of fiscal 2026, and remains below prior cycle peaks with lean channel inventories, positioning it for continued strong growth * Automation: Tailwinds from reshoring of manufacturing and labor shifts are driving demand for digital factories and advanced robotics; ADI's sensing, connectivity, and power solutions enable edge intelligence for automated production, with growing opportunity from advanced humanoid robotics * Electronic Test and Measurement (ETM): Supports end-to-end product development from R&D to mass production for AI, EV, and secure communications applications; ADI's RF, mixed-signal, and power solutions hold strong positions in high-value applications, with growing design pipeline amid increasing product complexity * Energy: Electrification and high-performance computing are straining legacy grids; ADI's monitoring, edge intelligence, and battery management system (BMS) solutions support grid upgrades and renewable integration; BMS for energy storage systems grew over 50% in fiscal 2025 and remains in strong demand in 2026 * Healthcare: Digitalization of clinical and non-clinical care is driving growth; ADI holds leadership positions in advanced imaging, patient monitoring, and surgical robotics, with growing double-digit revenue from wearable outpatient monitoring solutions and increasing large-OEM design wins * Broad Market Industrial: Has returned to robust growth; the long tail of tens of thousands of small/medium customers aligns well with ADI's broad diversified technology portfolio spanning all power and connectivity ranges - Key High Growth Segments * Data center and ATE businesses are achieving new revenue highs on steep growth trajectories, driven by AI-related infrastructure investment, with rising confidence in continued growth into 2027 * Aerospace and defense reached a new revenue high this quarter; growing national sovereignty concerns are accelerating an already strong multi-year growth path; the overall industrial segment is ADI's most profitable business with 15-20 year average product lifecycles - Financial & Capital Allocation * Trailing 12-month free cash flow was $4.6 billion (36% of revenue); the firm returned $5 billion to shareholders via dividends and share repurchases over the same period * Long-term capital allocation target is 100% free cash flow return to shareholders, with 40-60% allocated to dividends and the remainder to share repurchases; fiscal 2026 CapEx is expected to stay within the long-term target range of 4-6% of revenue

Guidance

- Third quarter fiscal 2026 revenue is guided to $3.9 billion, plus or minus $100 million, representing continued sequential growth across core end markets * At guidance midpoint, non-GAAP operating margin is expected to be 49%, plus or minus 100 basis points; the effective tax rate is projected to be between 12% and 14% * Adjusted fully diluted EPS is guided to $3.30, plus or minus 15 cents * Gross margin is expected to decline approximately 50 basis points from the second quarter level, primarily due to the absence of a one-time channel repricing benefit from Q2; mix is expected to act as a slight tailwind, while factory utilization will be broadly neutral * Sequential growth expectations by segment for Q3: mid to high single digits for industrial and automotive, low to mid teens for communications (the fastest growing segment), and a mid single digits decline for consumer * Management confirms capacity is sufficient to support the company's long-term 2030 target of $20 billion in annual revenue, with ongoing investment in internal capacity and strong partnerships for external capacity to support ongoing above-trend growth * Fourth quarter fiscal 2026 is expected to follow historical seasonality, with low single digit sequential revenue growth

Segment performance

Total company revenue for the quarter was a record $3.62 billion, growing 15% sequentially and 37% year over year. 1. Industrial: Revenue was $1.81 billion, representing 50% of total quarterly revenue, growing 20% sequentially and 56% year over year. All sub-segments grew both sequentially and year over year, led by aerospace and defense, ATE, ETM, and the broad market. 2. Automotive: Revenue was ~$868.8 million, representing 24% of total quarterly revenue, growing 8% sequentially and 2% year over year. 3. Communications: Revenue was ~$543 million, representing 15% of total quarterly revenue, growing 22% sequentially and 79% year over year. Data center accounts for over 75% of communications segment revenue, growing more than 90% year over year driven by optical and power portfolios; wireless within the segment grew over 35% year over year. 4. Consumer: Revenue was ~$398.2 million, representing 11% of total quarterly revenue, flat sequentially and up 23% year over year. On profitability, non-GAAP gross margin was 73% (up 180 bps sequentially, 360 bps year over year), non-GAAP operating margin was 49% (up 350 bps sequentially, 780 bps year over year), and fully diluted adjusted EPS was a record $3.09 (up 26% sequentially, 67% year over year).

Risks & headwinds

- Heightened geopolitical tensions and ongoing macroeconomic challenges create uncertainty for overall demand and supply chain operations * Industry-wide steep demand growth has created concerns about potential capacity tightness, particularly for external semiconductor manufacturing capacity, that could constrain output going into 2027 * Inflationary input costs create pressure on margins, requiring pricing adjustments to offset rising costs * The Empower Semiconductor acquisition is pending regulatory approval, and its timeline and revenue contribution are subject to closing conditions

Analyst Q&A

• Q: What is the current state of customer sentiment around supply, and how is ADI positioned to meet strong current demand? /

  A: Customer sentiment is broadly calm. While there is some concern about industry-wide semiconductor supply chain choke points (notably memory, which primarily impacts consumer customers), ADI's lead times remain in good shape. The company has more than doubled internal manufacturing capacity pre-COVID and built significant optionality with external suppliers, giving it enough flexibility to add more orders while maintaining strong customer service levels. Some niche segments face mild stress, but overall ADI remains well-positioned to meet demand growth. (322 characters)

• Q: What is ADI's near-term and long-term approach to pricing, and how sustainable are recent pricing gains amid competitor moves? /

  A: ADI has implemented price increases this year to offset input cost inflation, and will continue adjusting prices as needed to offset ongoing inflationary pressures. Long-term, ADI's ASP is 4-5x the industry average, with each new generation of product capturing additional value, and substitution risk after design-in is effectively zero due to long product lifecycles, making pricing gains very sticky. For full-year fiscal 2026, previously announced pricing actions are expected to add a couple of percentage points to the company's overall growth rate, with all Q2 upside above guidance coming from volume rather than incremental price. (458 characters)

• Q: What gap does Empower Semiconductor's technology fill that ADI could not develop internally, given ADI's existing power management portfolio? /

  A: Power management technology demands are extremely high right now for AI applications, which require far greater power density and delivery efficiency than prior generations. There was a gap in ADI's vertical grid-to-core power portfolio specifically for integrated voltage regulators and capacitor technology close to AI processing cores, and time-to-market is critical to capture the AI opportunity. Acquiring Empower's unique IP allows ADI to fill this gap much faster than internal development would allow, expanding the company's total addressable market for AI accelerator power solutions and moving ADI further up the value chain to serve customer needs more completely. (476 characters)

• Q: What is driving the stronger-than-expected automotive performance, and are we seeing restocking at OEMs and Tier 1 suppliers? /

  A: After tariff-related pull-forward of demand in 2025 created expected weakness in the first half of 2026, strength in automotive came earlier than expected, driven by a material pickup in Chinese demand during Q2 and record performance in Europe and Japan. For the first time in two years, ADI's BMS revenue returned to double-digit year-over-year growth, supported by rising EV penetration in Europe and China, and growing L3 ADAS adoption in China. ADI's long-term automotive growth is driven by content and share gains in ADAS and next-generation infotainment, not inventory restocking; customers remain lean on inventory after prior inventory digestion, which supports ongoing growth expectations. (471 characters)