ANALOG DEVICES INC (ADI Q2 FY2025 earnings call

Management Statement and Operational Highlights:

• Q2 results exceeded expectations with broad-based revenue growth across all end markets.
• Invested in hybrid manufacturing model, expanded capacity in U.S. and Europe, deepened partnerships with foundries.
• Focus on key megatrends: autonomy, proactive healthcare, energy transition, immersive experience, AI-driven computing.
• Examples of growth: health care (clinical-grade vital signs, imaging), autonomy (industrial robotics, automotive autonomy), AI-driven computing (ATE, data center).

Segment Performance:

• Industrial: Represented 44% of second quarter revenue, with 8% sequential growth and 17% year-over-year growth.
• Automotive: Represented 32% of quarterly revenue, with 16% sequential growth and 24% year-over-year growth.
• Communications: Represented 12% of quarterly revenue, with 5% sequential growth and 32% year-over-year growth.
• Consumer: Represented 12% of quarterly revenue, flat sequentially and up 30% year-over-year.

Guidance:

• Q3 revenue expected to be $2.75 billion, plus or minus $100 million.
• Operating margin expected to be 41.5%, plus or minus 100 basis points.
• Tax rate expected to be 11% to 13%.
• Adjusted EPS expected to be $1.92, plus or minus $0.10.

Risks:

• Tariff uncertainty impacting customers' decision-making, which could affect business performance.

Q: Discuss automotive, the 16% sequential growth really stands out relative to what peers are seeing? Just what's driving that and kind of any sense for if there's any tariff pull-forward in that or just any mitigation that's happening there?

A: Rich Puccio says Q2 auto results were aided by pull-in activity, estimate for pull-in upside in high single-digit range, buying behavior normalizing, expecting Q3 decline in auto.

Q: You mentioned that you are at a cyclical upturn. And I'm curious, how much do you think you are undershipping demand right now? Is it 10%? Is it 20%? And how many quarters until this kind of just undershipment impact normalizes?

A: Vincent Roche says in industrial, been undershipping significantly, getting back to normalized convergence, Rich Puccio says probably still shipping 10-plus percent below low-end consumption, expecting to ship into end demand in 3Q.

Q: Industrial Automation, I think you guys touched on it a little bit, which is one of your larger subsegments within industrial. I believe it's about 25% of industrial segment. This was one of the last large subsegments to show recovery given the tie-in to global manufacturing activity, automation inflected. I think in October of last year, it grew in January. Did you guys see further sequential growth in industrial automation in April?

A: Rich Puccio says continued to see growth, book-to-bill in excess of one, expect growth to continue into Q3, positive book-to-bill in all industrial subsectors above one.

Q: Robotics, I know this is a market that you have a lot of exposure to. And I think there was a slowdown in that market, especially around the pandemic. But now with AI, it seems that we're sort of at an inflection point. So, I was just hoping you could talk a little bit more about that opportunity and some of the design activity that you're seeing on the robotics side.

A: Vincent Roche says demographic shift, automation of productivity, new epoch in robotics with more tactile, precise systems using edge intelligence, content expected to be order of magnitude more over coming years.

Q: Just a question on leverage guys. So, if we look at the April quarter results and the July quarter guide, your OpEx is basically growing about as much as sales. And then, the guide for the July quarter, even though you don't guide gross margin implies minimal gross margin growth. So, can you just talk about why that's happening? And should we expect some sort of acceleration in leverage going forward? Or should OpEx continue to grow about the same amount of sales and same way with gross margin?

A: Mike Lucarelli says Q2 operating margin up sequentially despite big acceleration in variable comp, base OpEx flat sequentially, Q3 expects continued operating leverage offset by annual salary increases and variable comp growth, expecting more leverage in '26. Rich Puccio says at 2.75 guide, expect around 70% gross margin, industrial growth leading to margin recovery.

Q: Given the auto dynamics, what are your expectations for SAAR and auto builds like into the second half of the year amid all the tariff uncertainty because I think autos are getting hit more by that?

A: Rich Puccio says expect SAAR down in back half, still get benefit from content increase to offset some SAAR pressure.

Q: How should we be thinking about the puts and takes as we go into the second half?

A: Rich Puccio says Q3 outlook reflects acceleration in recovery, most notably in industrial market, expecting strong quarter, confident to end at higher end of full year growth range but cautious due to tariff uncertainty.

Q: Do you get the sense that there's any element of your end customer restocking that's going on? Or do you think this is really just an industrial recovery?

A: Rich Puccio says don't call it restocking, think customers had lean inventory and purchasing accelerated, not expecting undership industrial in Q3. Vincent Roche says use POS signals to gauge true demand, industrial moving to normalized shipping and sell-through.

Q: I actually kind of wanted to ask about the plans outsourced versus in-source. So obviously, pre-pandemic, you're leaning more towards external. And then when you ran out of supply, it was let's do more internal. I heard you talking about qualifying external fabs. I'm just kind of how are you thinking about this now? Obviously, tariffs are moving target, but it does seem like more diversity in foundry, geographic location is preferable? How are you thinking about it now?

A: Vincent Roche says in good place with capacity footprint, more than 2x pre-pandemic, invested in front and back end for growth and resiliency, secured position in internal nodes for majority revenue, partner with key collaborators on finer geometry nodes.