Analog Devices, Inc. (ADI) Q4 2025 Earnings Call Transcript

Access earnings results, analyst expectations, report, slides, earnings call, and transcript.

Overview

The earnings call summary and Q&A indicate strong financial performance with a 35% YoY EPS increase, margin expansion, and double-digit growth in key segments like communications and consumer. Despite some uncertainties in the macro environment and limited visibility, the overall guidance remains optimistic with expectations of broad-based growth in fiscal '26. Positive factors like strong content gains and design wins in auto, alongside promising AI and defense sectors, contribute to a positive outlook. The lack of specific guidance for Q2 is a minor concern but doesn't overshadow the overall positive sentiment.

Key Financial Performance

Revenue for fiscal year 2025 $11 billion, up 17% from fiscal 2024, driven by double-digit growth across all end markets.

Gross margin for fiscal year 2025 69.3%, up 140 basis points year-over-year, driven by higher utilizations.

Operating margin for fiscal year 2025 41.9%, up 100 basis points year-over-year, including the headwind associated with the normalization of variable compensation.

Earnings per share (EPS) for fiscal year 2025 $7.79, up 22% year-over-year, reflecting top-line strength and margin expansion.

Free cash flow for fiscal year 2025 $4.3 billion, or 39% of revenue, up from 33% in fiscal 2024, driven by strong operating results and reduced CapEx.

Revenue for Q4 fiscal year 2025 $3.08 billion, up 26% year-over-year, driven by growth across all end markets.

Industrial revenue for Q4 fiscal year 2025 46% of total revenue, up 34% year-over-year, driven by cyclical momentum and secular growth in AI infrastructure.

Automotive revenue for Q4 fiscal year 2025 28% of total revenue, up 19% year-over-year, driven by leading connectivity and functionally safe power solutions.

Communications revenue for Q4 fiscal year 2025 13% of total revenue, up 37% year-over-year, driven by strong growth in the data center segment and improving wireless revenue.

Consumer revenue for Q4 fiscal year 2025 13% of total revenue, up 7% year-over-year, driven by growth in handsets, gaming, and hearables and wearables.

Gross margin for Q4 fiscal year 2025 69.8%, up 190 basis points year-over-year, driven by higher utilization and favorable mix.

Operating margin for Q4 fiscal year 2025 43.5%, up 240 basis points year-over-year, driven by higher utilization and favorable mix.

Earnings per share (EPS) for Q4 fiscal year 2025 $2.26, up 35% year-over-year, reflecting strong revenue growth and margin expansion.

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Operating Highlights

R&D Investments: Record investments in FY '25 to advance leadership in analog, mixed signal, and power technologies, with a focus on software, digital, and AI capabilities.

New Products: Higher average selling prices (ASPs) for new products compared to legacy offerings. Examples include the E2B Ethernet bus for automotive and the Acoustics platform for consumer and healthcare segments.

Design Wins: Secured design wins in areas like consumer electronics (e.g., smart glasses, premium handsets) and automotive (e.g., GMSL, A2B).

Industrial Sector: Growth driven by AI, automation, and energy efficiency trends. Record year for automatic test equipment (ATE) business and strong demand in grid management and battery storage systems.

Automotive Sector: Advances in autonomous driving and cabin digitalization led to record growth, outpacing light vehicle production. New E2B Ethernet bus gaining traction.

Communications Sector: AI CapEx investment drove record growth in the data center segment, surpassing a $1 billion run rate. Wireless communications showed signs of recovery.

Consumer Sector: Growth in hearables, wearables, gaming, AR/VR, and smart glasses. Acoustics platform tripled value over legacy designs.

Revenue Growth: Revenue for FY '25 was $11 billion, up 17% from FY '24, with double-digit growth across all end markets.

Free Cash Flow: Generated record free cash flow of $4.3 billion, representing 39% of revenue.

Gross Margin: Improved to 69.3% for FY '25, up 140 basis points year-over-year.

Maxim Acquisition: Allocated over $3 billion in capital expenditures to enhance capacity and resiliency, supporting long-term growth.

Customer-Centric Investments: Investments in proprietary tools and open-source platforms to streamline customer product development.

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Risk or Challenges

Macro and geopolitical headwinds: The company faces persistent macroeconomic and geopolitical challenges, which could impact revenue growth and operational stability.

Tariffs and trade uncertainty: Ongoing tariffs and trade uncertainties continue to pose risks to the company's operations and supply chain.

Wireless communications market softness: The wireless communications segment experienced softness in fiscal 2025, which could impact future revenue if recovery is slower than anticipated.

Inventory management challenges: Higher inventories and increased channel inventory levels could lead to inefficiencies or financial strain if demand does not align with supply.

Regulatory and compliance risks: The company operates in highly regulated markets, and any changes in regulations or compliance requirements could adversely affect operations.

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Guidance & Outlook

Revenue Expectations: Revenue is expected to be $3.1 billion, plus or minus $100 million for Q1 FY 2026.

Operating Margin: Operating margin at the midpoint is expected to be 43.5%, plus or minus 100 basis points for Q1 FY 2026.

Tax Rate: The tax rate is expected to be 12% to 14% for Q1 FY 2026.

Adjusted EPS: Adjusted EPS is expected to be $2.29, plus or minus $0.10 for Q1 FY 2026.

Industrial Sector Growth: Continued growth is anticipated in FY 2026, driven by AI infrastructure, automation, and energy demand.

Automotive Sector Growth: Further growth is expected in FY 2026, driven by advances in autonomous driving and cabin digitalization.

Communications Sector Growth: Continued growth is expected in FY 2026, supported by AI CapEx investment and demand for high-throughput connectivity.

Consumer Sector Growth: Growth is anticipated in FY 2026, driven by integrated solutions in hearables, wearables, gaming, AR, and VR.

Energy Segment Growth: Continued growth is expected in FY 2026 and beyond, driven by demand for grid management and battery storage systems.

Aerospace and Defense Growth: Further growth is expected in FY 2026, supported by an expanding portfolio of advanced sensor, mixed signal, and power solutions.

Wireless Communications: Market recovery is anticipated in FY 2026, following inventory digestion and new product launches.

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Shareholder Return Plan

Dividend Increase: The company supported an 8% dividend increase in fiscal 2025.

Share Repurchase: The company returned more than $4 billion to shareholders, which included share count reduction.

Free Cash Flow Allocation: The company targets 100% free cash flow return over the long term, using 40% to 60% for dividends and the remainder for share count reduction.

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Key Q&A

Q:Can you provide color by segment on the strength seen in Q1 and the broader macro perspective for fiscal '26?

A:Q1 is expected to be slightly up quarter-over-quarter, marking the seventh straight quarter of above seasonal growth. Industrial is expected to be up mid-single digits above seasonal, auto down mid-single digits below seasonal, comms up 10% above seasonal due to AI infrastructure demand, and consumer down low double digits seasonally. For fiscal '26, broad-based growth is anticipated, led by industrial and communications, with strong content growth in aerospace, defense, and AI-related sectors. However, the macro environment remains uncertain.

Q:What drove the better-than-expected performance in the auto segment, and are there signs of pull-forwards or other activities?

A:Auto has been the strongest market due to secular content gains and share gains, particularly in connectivity and power for ADAS and infotainment systems. Share gains in China have been significant. Some upside in volumes was tariff and policy-related, but pre-buying did not unwind as expected in Q4. Q1 is expected to be sub-seasonal, down mid-single digits sequentially but up year-over-year, with strong content gains and design win traction expected to drive fiscal '26 growth.

Q:Why are gross margins not showing more leverage despite higher utilizations and favorable mix?

A:Gross margins did not reach 70% as planned due to a weaker-than-expected industrial mix and stronger auto results. Q1 gross margins are expected to remain flat due to higher industrial mix offsetting seasonal pressures from factory shutdowns. Achieving higher gross margins will require higher revenue levels and continued favorable mix shifts.

Q:Have relative gross margin levels changed between end markets, particularly for auto?

A:No significant changes have been observed in the relative gross margin levels between end markets, including auto, over the past 2-3 years.

Q:Can you provide an update on Maxim revenue synergies and typical fiscal Q2 seasonality?

A:Maxim synergies contributed tens of millions to ADI's top line in fiscal '24 and are expected to reach hundreds of millions in fiscal '25, with a $1 billion target by fiscal '27. Fiscal Q2 is typically the strongest quarter, with mid-single-digit sequential growth expected.

Q:What is the growth outlook for AI-driven data center and ATE businesses?

A:Data center grew 50% and ATE grew 40% in fiscal '25, with both expected to continue double-digit growth in fiscal '26. Data center is at a $1 billion run rate, driven by demand for advanced electro-optical interfaces and power management. ATE is at an $800 million run rate, benefiting from new memory types and higher pin count requirements.

Q:What is the growth outlook for the aerospace and defense market?

A:Aerospace and defense grew strongly in fiscal '25 and is expected to continue double-digit growth in fiscal '26. Key drivers include RF and microwave technologies, power management, and increasing global defense spending. The business has the potential to more than double by the end of the decade.

Q:What is the visibility for fiscal Q2 and how has it changed with the mix shift?

A:Visibility remains limited beyond the current quarter due to short lead times (sub-13 weeks) and in-quarter orders. While the mix shift to ADO drivers like aerospace, defense, and data center has strengthened the business, it has not significantly improved visibility.

Q:How is ADI prioritizing R&D spending given the changing economic environment?

A:ADI is doubling down on power management and digital technologies, including low power, low latency, and machine learning-enhanced functionalities. The focus is on solving complex customer problems and accelerating innovation cycles across attractive markets.

Q:Review of Unclear Management Responses

A:Management avoided providing specific guidance for fiscal Q2, only confirming historical seasonality trends. They also did not provide precise details on the impact of tariffs and policy-related pull-ins in the auto segment or the exact timeline for achieving higher gross margins beyond 70%.

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Earnings Word Cloud

The most frequently occurring keywords in this quarter's earning call

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