Analog Devices at Bernstein Conference: Strategic Insights on Growth

On Thursday, 29 May 2025, Analog Devices (NASDAQ:ADI) presented its strategic vision at the Bernstein 41st Annual Strategic Decisions Conference 2025. CFO Rich Puccio discussed the company’s resilience amidst a downturn and its growth strategies, highlighting both challenges and opportunities. The hybrid manufacturing approach, focus on innovation, and strong performance in China were key points of discussion.

Key Takeaways

• Analog Devices aims for 7-10% growth, focusing on pricing discipline and synergy revenue.
• Hybrid manufacturing strategy provides flexibility, with 70% of products being adaptable.
• China has shown strong recovery, contributing significantly to revenue.
• Investment in AI and R&D is expected to drive future growth.
• The company remains vigilant about potential demand disruptions due to tariffs.

Financial Results

• ADI demonstrated resilience during its second-worst downturn, maintaining gross margins at 67% and operating margins above 40%.
• The company targets 7-10% growth, with a focus on stable pricing throughout 2025.
• Revenue synergies from the Maxim acquisition are expected to reach $1 billion by 2027, with significant contributions anticipated in 2025.
• Variable compensation is influenced by increased revenue growth and operating margin improvements.

Operational Updates

• By year-end, 70% of ADI’s products can be manufactured internally or externally, offering flexibility during demand fluctuations.
• The company operates a 50/50 internal/external production split, with peak demand pushing factory utilization rates above 100%.
• ADI’s extensive product portfolio includes around 75,000 SKUs, with a small percentage driving the majority of revenue.
• Manufacturing facilities are located in the US and Ireland, with back-end operations in Asia.
• China, accounting for approximately 30% of revenue by ship-in, has shown strong recovery over three quarters.

Future Outlook

• ADI is optimistic about growth, driven by automation, electrification, and robotics.
• The company is confident in achieving the high end of its 7-10% growth target for 2025.
• In the automotive sector, ADI anticipates a seasonal Q3, accounting for previous pull-ins.
• A cyclical upturn in the industrial sector is expected, potentially enhancing margins.
• Strategic capital allocation towards innovation aims to keep ADI at the forefront of industry trends.

Q&A Highlights

• A spike in automotive bookings was noted around the introduction of auto tariffs, indicating a pull-forward from future quarters.
• China has been a competitive market, but ADI’s performance and value proposition remain strong.
• The company is not planning additional fab capacity in the US, citing a comfortable factory footprint.
• Investment in AI focuses on enterprise-level applications and AI at the edge.

For more detailed insights, please refer to the full transcript below.

Full transcript - Bernstein 41st Annual Strategic Decisions Conference 2025:

Stacy Rasgon, Analyst, Bernstein: I guess we can get started. See if we get any stragglers. Is it still morning? I guess it’s sort of morning. Yeah.

It was late morning, everyone. I I’m Stacy Rasgon.

Rich Puccio, CFO, Analog Devices: I

Stacy Rasgon, Analyst, Bernstein: sorry. I cover The US semiconductor sector here at Bernstein, and it’s my great honor, to introduce our guest today, the CFO of Analog Devices, mister Rich Pucccio. Before I start, I wanna mention if you have, questions you’d like to ask during the presentation or have asked, you have a link to our pigeonhole form where you can submit them, and we will have time, for q and a at the end. So all the companies that I cover, Analog Devices is probably one of, if not the most, respected, an extremely high quality franchise in the analog space, particularly as it relates to signal conversion and and and processing. And they’ve really transformed over the last it was probably fifteen years now.

I mean, they rationalized their product portfolio way back in the days focusing on high value applications like whatever the market. They’ve executed on a really well done hybrid manufacturing strategy that’s offered flexibility as well as supported margins in in downturns. They’ve They’ve now been trying to take advantage of inorganic opportunities where available to boost the franchising growth potential. And they’re now embarking on more aggressive capital return than we used to see a few years ago, which is good. And just tell us all about it, it gives me great pleasure to introduce Rich.

So thank you so much for being here today.

Rich Puccio, CFO, Analog Devices: Thanks, Stacy. Forward to that. Yeah. There we go.

Stacy Rasgon, Analyst, Bernstein: So you you were here last year or two, and I I think you just said that was your sort of very first sort of public appearance as a as a CFO, of Analog Devices. So you’ve been in the job now about a year. Like, I I’m just curious, like, what have you, you know, what surprised you? You know? Any any any any regrets?

Rich Puccio, CFO, Analog Devices: So so certainly no regrets. And I think when I sat here a year ago, I I talked a little bit about, you know, one of the surprises to me. Even though I did a ton of research before I joined the company, one of the surprises was, you know, digging in to see how sticky and how long the products are. And and Stacy talked about the analog franchise. You know, when you get inside and look and see that we have products that are still producing revenue twenty five years after they launched Do

Stacy Rasgon, Analyst, Bernstein: you still show that chart?

Rich Puccio, CFO, Analog Devices: We the the, sediment chart, I think, is what we’ve gotten to calling that is is showed. The thing that became even clearer over the last twelve to fifteen months as we continued through what was, you know, for us, the second worst downturn we’ve we’ve ever experienced as a company was the resilience that our business model demonstrated. You know? And and a and a big piece of that is what you just described is our hybrid manufacturing process, which gives us a level of flexibility as we go up and down in the cycle to manage the utilization of our factories. But at the same time, you know, the other thing that was happening, and I think this also speaks to our resiliency, is our sales teams and and field teams were were cranking on generating new design wins across our portfolio.

So, you know, if you go back to the to the prior years, where we were generating peak amounts of revenue with two straight years of very strong double digit growth in design wins. You know? And for us, that’s, you know, a really good indicator of the potential for growth in the three to five year out period. So seeing that resiliency in the face of what was a very challenging you know, I think Vince has been quoted a number of times saying it’s the worst inventory correction he’s seen in his entire career. And for the company to manage through that and hold the line pretty well considering the severity Mhmm.

From a margin perspective, you know, I thought that that was an incredible testament to the business model.

Stacy Rasgon, Analyst, Bernstein: Maybe it’s worth jumping ahead then to that margin question. You know? So I remember when when I first started this job, I think the peak margins of the business were, you know, maybe upper fifties. And then there were some actions taken around the financial I mean, there were there were some business exits. You you I think you’re one of the few guys who actually get paid to sell a cellular modem business.

I don’t think anybody else has managed it since. And there’s some other businesses exit. And then there was some portfolio manufacturing flipping rationalization back in the days. There was Ireland and Santa Clara, I think, and and and, Cambridge and Massachusetts. And I remember we came out of the financial crisis, all of a sudden, now the trough margins were higher than the peak margins used to be.

They were kind of, like, high fifties to low sixties. And there were sort of further improvement, and then you did some fairly accretive acquisitions. You bought linear, which I think got the highest gross margins, like, bar none in the in the space, like mid to upper seventies, and then Maxim, which had seventies. And you you sort of talked about gross margins probably holding in in that 70% range. You didn’t quite get there, but high sixties for the you know, 67, I think, is where it bottomed maybe ish.

Rich Puccio, CFO, Analog Devices: 67 and change.

Stacy Rasgon, Analyst, Bernstein: You know, for for the the magnitude of the revenue decline that we had around the cycle, I I think it’s pretty damn impressive, personally. So, maybe you could talk a little bit about that that manufacturing, the hybrid manufacturing strategy. How does that work? Like, my understanding is your licensing processes from TSMC and the capacity is fungible. Like, how does that actually work?

Because there aren’t a lot of other companies that have been able to pull something like that off at scale.

Rich Puccio, CFO, Analog Devices: Yeah. So great great points on the margin. And, we were disappointed in in of my IR team that built the long term model in ’22. I think they contemplated some downsides. I don’t think they contemplated the severity.

So us to hold pretty close to 70, we felt really pretty good about that. So what the company has done what we’ve done, you know, from a flexibility perspective is what you described. You know, we have the ability to produce at this point, the majority of our products can be produced in our own factories or in our external barges.

Stacy Rasgon, Analyst, Bernstein: What percentage of products and of revenue?

Rich Puccio, CFO, Analog Devices: So by the end of this year, we expect about 70% our products to be able to be manufactured internally or externally. And I always caveat this. That’s not a statement that we, you know, that we would move 70% of our stuff out. We still tend to run about fifty fifty internal, external for

Stacy Rasgon, Analyst, Bernstein: Is that 70% of revenue as well? Or

Rich Puccio, CFO, Analog Devices: Yeah. It’s 70% of revenue as well. So, you know, if you if you think about that, what what it means for us is when things were going crazy in the upturn coming out of the pandemic, you know, we were able to go external with and get extra capacity from our foundry partners. And so that that helped us mitigate, you know, our factories during the peak of the Uh-huh. The comeback.

We’re running, you know, way above normalized, you know, utilization rates, you know, I think even getting to 100 plus percent at one point theoretically, but significantly above the sort of ideal utilization rates. So then, you know, look at the trough, you know, drop peak to trough drop across any of our end markets.

Stacy Rasgon, Analyst, Bernstein: Much was it? It was more than 30%. Right?

Rich Puccio, CFO, Analog Devices: It was about I think it was about 3031, or was it did it go to 34 in the last quarter? So it was no it was north of 30 Uh-huh. Peak to trough. And for us to be able to maintain a margin in the high sixties, part of that was our ability to bring capacity back in. Now you can’t do it overnight, but with some notice period, we can bring back some of the products that we might be using in an outside foundry into our factories to help keep the utilizations from going down.

Because you talked about this before. Right? If you look at peak the peak margins that you were talking about, say you go back even the most recent peak margins in the ’twenty two, ’twenty three time period, where we got operating margins up in the 50s, if you look at the revenue drop from then, there were sort of two primary drivers to the margin hit. One was underutilization in the factories and the variances that got thrown off was a very significant headwind for us, because we were well below utilization levels that we would be at historically. The other piece of that was at the same time, you know, the industrial was feeling it pretty hard.

And so if you go back and look in, I think, ’23, our industrial business was about 53% of the overall business. It’s also our highest margin business. So now you go back and look at the last quarter, it’s down to 44%. And so that is those two items were pretty significant downward pressure on the margin. And to hold other than, I think, one quarter, which would dip below, to hold greater than 40% operating margin at the bottom of the trough, you know, that is attributable to that factor.

Now the other piece that, because it’ll come up eventually when you talk about OpEx. The other thing is we have a variable comp plan. Yeah. It’s all it’s in our proxy, so I’m not disclosing any state secrets. Our variable comp plan is driven by operating margin percent.

And revenue. And revenue growth. So in the trough, there’s zero revenue growth. And at, you know, 40 ish operating margin, there’s not a lot of variable comp. You know, we’re now in a period where we’re, you know, moving up a little bit in the operating margin but significant year over year growth.

So, you know, you saw it actually because it was in we just talked about it in our my prepared remarks. You know, the impact of variable comp was the entire growth in our sequential growth in our OpEx. So we’ve been talking about this since I think we did guidance in Q4. For fiscal twenty twenty five, we expected to see less operating leverage than you would normally see in a year with this much revenue growth because we’re going from paying very low, variable compensation to a pretty significant step up. But if you think and you move out a little bit longer term or even a year later, the step up in variable comp, even if we continue to grow in ’26, doesn’t look like it did in the current year.

So we would expect the margin operating margin expansion to improve as we get into the outer years. But if you go back to your original question, that ability to swing because we have qualified those products know, gives us an advantage over over many of our competitors.

Stacy Rasgon, Analyst, Bernstein: That must be difficult to measure. You have, what, a hundred thousand different products? I mean I think

Rich Puccio, CFO, Analog Devices: I think the last count’s a 25,000. But in in fairness, a much sorry? I said what did I say?

Stacy Rasgon, Analyst, Bernstein: As customers. Okay. 70,000 products. 75,000 SKUs.

Rich Puccio, CFO, Analog Devices: I got it backwards. But, anyway, if you break it down, a much smaller percentage of the 75,000 SKUs generate the majority of the revenue. Okay. So, yes, it is. But at any given point, there is a subset of part subset of of our SKUs that are not moving.

Mhmm. You know? And and the fast movers make up a bigger piece of that, so it does make it a little bit but, yes, you know, kudos to our operations team for their ability to manage that with our external foundries and our internal factories.

Stacy Rasgon, Analyst, Bernstein: Got it. But I do wanna talk about growth. So you guys have had maybe long term is not quite there, but but you give, like, typically, a three year targets for growth. It’s seven to 10% at at at this point off of

Rich Puccio, CFO, Analog Devices: I can’t remember what the

Stacy Rasgon, Analyst, Bernstein: base was. The base ’23? I can’t remember. In ’22. Okay.

So we’re almost we’re almost through it. But maybe you could give us a little bit of color on, like, the the like, where does that growth actually come from? And, you know, the the second question is is you’d said something on on the earnings call, which I I think that was a statement for this year, but you felt confidence in in that target.

Rich Puccio, CFO, Analog Devices: But, I

Stacy Rasgon, Analyst, Bernstein: mean, what what are the drivers behind behind those targets?

Rich Puccio, CFO, Analog Devices: Sure. I’ll actually, I’ll I’ll I’ll do a little bit of a recap of how we’ve actually built out the model when we when when they’re doing it. Because I I I spent a fair amount of time in my first month at the company trying to make sure I was comfortable with the long term models. So, you know, if you think about the historical growth in in the space, you know, and say it’s a 5% kinda CAGR business. And then we looked at it

Stacy Rasgon, Analyst, Bernstein: and said, alright. What are

Rich Puccio, CFO, Analog Devices: the things that differentiate us, whether it’s from an idiosyncratic driver or other things that will allow us to grow it faster than that sort of CAGR that we’ve seen historically. So so, one, the pricing dynamic for ADI has changed. If you think about the historical Moore’s Law world where every year semis went back and gave back big slugs of their savings to customers, you know, that changed. Right? Things became very inflationary.

That, you know, that model did not continue to work, we’ve been pretty disciplined. So one of the things we haven’t been doing is giving back large slugs of the price increase. So if you go back again 2021, we did our Analyst Day, we had pretty significant portion of our growth, and I think we talked about it, was driven by price increase. We saw a pricing tailwind in 2023. And then as I’ve talked about, 2024 was pretty stable pricing for us.

We expect ’25 to be pretty stable. So if if you just think about not giving back that price that pricing gain, you know, we think that’s worth at least a point of growth off of that 5% baseline. The second the second piece we’ve talked about is when we acquired Maximum, we we set a target out there to get a billion dollars of synergy revenue synergies by 2027. Okay. K?

So if you think about the progression we’re on, you know, in the in the ’24, we did sort of the tens of millions of synergy revenue. In ’25, we’ll do hundreds of millions, and we are on track to do a billion dollars worth of revenue synergies from Maxim. So if you go off of a $10,000,000,000 base, that’s another point. And the third point is the is the is the industry tailwinds where we’re where we participate across a number of the sort of common biggest trends, whether it’s automation, electrification, robotics. You know, you think about all these talents.

And the other piece is the idiosyncratic parts of the business where we’ve got, you know, specific design wins and and in our end markets that are now producing producing revenue. So if you

Stacy Rasgon, Analyst, Bernstein: think what?

Rich Puccio, CFO, Analog Devices: So if you think about and we’ve talked a lot about this this year. ATE, our test business, has been growing gangbusters, and that’s being driven by the as are many of these being driven by the AI boom. Right? You think about the the high performance compute, the high bandwidth memory, those all require more testers. That’s been a big benefit for us, so that has been growing significantly for us.

You know, on also on the AI side, if you think about what’s going on from a power and connectivity perspective, we see we have wins in in both of those areas that show up in our wireline slash data center business. You know, that’s strong growth. In autos in our auto end market, we’ve got GMSL, which is, know, a fantastic technology.

Stacy Rasgon, Analyst, Bernstein: What what is that for the

Rich Puccio, CFO, Analog Devices: the audience here? It is a it’s the connectivity for video inside of an automobile. So for us, it’s a chip at the at the edge, which is, you know, at the the microphone or the camera excuse me, at the camera and then back at the central compute. So that GMSL has been powerful. And that’s actually one of our big synergy drivers is GMSL.

If you look at aerospace and defense, we’ve got a number of design wins in there, and that’s a market we expect to continue to grow given defense budgets everywhere in the world are being increased. So we think that’s a good piece of a tailwind for us. And then the other piece is, you know, as over the last number of years, we’ve significantly diversified our consumer business. And we have a number we’ve talked about this a number of new design wins in that are ramping, and we’re seeing growth, you know, across the portfolio, whether it’s in handsets, whether it’s in hearables, wearables, gaming. So those are all areas continuing to grow, and I think we’ve grown where you’d see that in our consumer business, we’ve grown consumer, I think, 30% in three straight quarters.

So feel really good about those. And those from an aggregate, just in ’25, we think those are $500,000,000 worth of incremental revenue. So we think in total, the idiosyncratic and the market tailwinds worth another billion. That gets you sort of the above the midpoint a little know, right around the in the seven to 10 above the midpoint. And then we think the the additional areas just is better execution across the board in those areas can get us to the high end.

Got it. And so we we and we and we and like we said, we feel pretty good about where we’re going. And I did I did make a comment on the, on the call.

Stacy Rasgon, Analyst, Bernstein: I wanted to ask about that.

Rich Puccio, CFO, Analog Devices: Are you gonna ask? Because yeah. Because Alright. I’ll let you ask then.

Stacy Rasgon, Analyst, Bernstein: Well, mean, on the question, you said you felt for the year you felt increased confidence about hitting the high end, which is 10%. But, I mean, that would actually put q four down a ton. Like, did did you just kinda did you misspeak there or, what?

Rich Puccio, CFO, Analog Devices: So in hindsight, I would call it a misspeak at the time. I’ll tell you what I was really just trying to do was express con that I had more confidence in the year ’25 than I did ninety days ago. Because if you just take a normal seasonal quarter for us in the fourth quarter, we will be well above 10%. Yeah. More like 12% if

Stacy Rasgon, Analyst, Bernstein: we Unfortunately, you know us. Like, we we do You all went it’s Right.

Rich Puccio, CFO, Analog Devices: He just he just soft guided the quarter down the fourth quarter down 7% Yeah. Which is not what I intended to do. Okay. In fact, the seasonal quarter would put us above the range. Okay.

That was a confidence statement, not a guide.

Stacy Rasgon, Analyst, Bernstein: Got it. Okay.

Rich Puccio, CFO, Analog Devices: So sorry for the confusion for anybody who heard that comment, but that was just me being more confident. And look. The confidence stems from we we’ve started saying in q two last year that we had to hit the bottom, and we were gonna start seeing growth. We saw sequential growth in q three and q four. We had our you know, we almost we’re almost flat in q one, but a slight decrease in q one.

And then one of the things that happened in q one is what we’ve been waiting for is to see some of the broad market industrial start to grow. We’ve been in

Stacy Rasgon, Analyst, Bernstein: a downturn there. I don’t I don’t know. Eight quarters, ten quarters for you

Rich Puccio, CFO, Analog Devices: guys, however long it was? Yeah. Two years. So to see some broad market growth to us was one of the first signs that we were starting to see the industrial maybe a start of a cyclical. Well, that trend continued into q two.

You know, we delivered very strong results in q two, and we’re guiding to q three with 10% growth. You know, at some level, coming out of the coming out of that quarter, for us, you know, we were waiting for the because typically, you see a, you know, a bit of an upturn like this when you’re starting the cyclical upturn. Because the question has been for a number of quarters, when will we see the Mhmm. A more familiar looking upturn? Now do we know the exact slope of that upturn line?

No. But do does it look like it’s getting a little steeper for us right now? Absolutely. And so that’s important. Tie it back to the first part of this conversation is if industrial starts to, you know, outgrow the rest of our business, you know, that’s a margin accretive thing for us because at the standard at the gross margin line, that’s the highest gross margin business we have.

Right. No. No.

Stacy Rasgon, Analyst, Bernstein: That that that makes that makes sense. I I guess with with that recovery, you know, and and it it sort of ties to the auto piece as well. Right? So auto was pretty strong in the quarter, but you you sort of the dreaded p word on the, on the call. It’s funny, like, as you sort of look at the stock that evening, it was kinda good until we said pull forward.

And then I

Rich Puccio, CFO, Analog Devices: I I might have gotten a few snap screenshots of the ticker after that session pointing out my commentary. So yep. But I I

Stacy Rasgon, Analyst, Bernstein: I guess Thank you, Stacy,

Rich Puccio, CFO, Analog Devices: for pointing it out again.

Stacy Rasgon, Analyst, Bernstein: I mean, look. But I mean, to your credit, like like I said, we’re talking earlier. I mean, you you call it like you see it and, you know, try to be honest with yourselves and with us, and so I I can appreciate that. But I I guess, you know, what did you see there that suggested it was pull forward? And, like, what are you seeing now?

And then, I guess, the follow on is the upside in industrial. How would you know that that’s not also pull forward versus just, like, broader cyclical recovery?

Rich Puccio, CFO, Analog Devices: Two great questions. So, you know, as we obviously track very closely. We run we run our whole business on POS, right, how things are selling through, and we look at You should report sell through, actually, like Well, we won’t comment about what the accounting folks have done to us. But we do run the business on the POS signals, but we also so we’re looking at POS bookings pretty regularly. And as we watched the quarter progress, we were seeing what we expected as we had forecasted the quarter in growth in bookings across our end markets.

And then what we saw was right around the time of the introduction of the auto tariffs, we saw a spike in automotive bookings. We also started to see increased turns business in the automotive space. And that lasted, you know, Liberation Day and for about another week. But after about three weeks of that anomalous behavior, it sort of normalized back down into the weekly ordering patterns that we would have expected. So when we looked at that, first we didn’t see that kind of anomaly in any of the other end markets.

So we don’t have perfect visibility that what we said was pull in was all pull in. We don’t have perfect visibility that we called no pull ins might have had some. But we didn’t see any of the significant anomaly that we saw in automotive. So, you know, we talked about on the call that we thought, you know, the pull ins could have been half of our beat, you know, from a from a overall perspective. And, you know, seeing it normalize back down was was one of the signals for us that it was likely pull in.

It was it was hard for that to just be a coincidence. And I understand we had lots of discussion and debate about this, but ADI has and this predates me, ADI has always been as transparent with the facts as I can, so we continued that trend. Now I think, you know, one of the things, you know, we’ve been super focused on is q three’s guide I’ll use just talk about automotive. Right? Q q three’s guide, we guided down, but largely, we guided down because of the Right.

Pull ins. We don’t actually think the pull ins came from q three, which is why if you factor out the pull ins in q two, we’re essentially guiding a seasonal q three in auto. Now what we’re focused on, and and as you you and I were talking before we started, our industry is plagued by the lack of, you know, longer term visibility on where things are headed, but we are actively monitoring and tracking what’s the backlog build looks like in the out quarters because our suspicion is, that the pull in is likely from Q four or Q one.

Stacy Rasgon, Analyst, Bernstein: Okay.

Rich Puccio, CFO, Analog Devices: And so we will watch that, which is why we think that the q three is today, as we’re forecasting it, doesn’t really factor in any incremental pull in activity. Now the rules change every day. They may have changed again last night. I have always knew what the rules to three federal judges. Right.

So, at this point, we’re staying very close to our customers. Matter of fact, we we just had our teams out and met with all of our top hundred customers to talk about how things are going and what the rest of the year looks like. And we’re not seeing a lot of, you know, unusual behavior yet Okay. Be because of the suspension of the tariffs, and we’re still in potentially a pause here. So, you know, that’s the wild card here.

And and for us, you know, the the impact of tariffs and the thing we worry most about is just the overall macro impact and the potential demand disruption. Yeah. Right? Because you think about the number of places our products go that will wind up getting tariffed if those new tariffs go into place and then the reciprocal tariffs hit, and that could cause some demand destruction. We we haven’t seen that yet based on the results, but that’s the the variable we’re all planning for.

Stacy Rasgon, Analyst, Bernstein: Yeah. I mean, that’s been my my bigger worry. It’s not so much the risk of direct tariffs on semis. Even if they’re 25% away, it’s semi ASPs over the last five years are up 50% anyways. We can probably handle something like that.

But demand destruction, everything else, I don’t have any any way to get a handle on it. Doesn’t sound like you guys do either.

Rich Puccio, CFO, Analog Devices: No. And, look, we’re we’re doing all the things that you’d expect. And, you know, I actually was I had a conversation with a group of economists at the end of last week. You know, we’re paying attention to how they’re forecasting GDP and what that might do and how the various economies might be impacted. You know?

And and, unfortunately, at least everything I’ve seen and heard is that the economy that GDP is likely most affected by this is The US. Right? Because, you know, China’s still forecasting four plus percent GDP growth. So we’re continuing to watch that, and that and that’ll be an important factor for us. But right now, we’re most focused on serving customers today, making sure we deliver on our promises because, you know, things could change, but we gotta serve today.

Stacy Rasgon, Analyst, Bernstein: Got it. Got it. So we’ll watch auto into q four and q one, at least. Maybe that’s a good segue actually into sort of your geographical footprint. And and I’d love to learn a little bit both about your your manufacturing footprint as well as your demand footprint.

So maybe if we start a manufacturing, you have internal and external. Just, like, how how are you organized, like, in terms of where the wafers are actually coming from and packaged?

Rich Puccio, CFO, Analog Devices: Sure. I’ll I’ll do the the the quick tour. Yeah. So start I’ll start on the the left part of The United States. Right?

We’ve got manufacturing capacity, you know, out out in Oregon and Washington. You come you come back to the East. We’ve got manu we’ve got manufacturing in Wilmington, Massachusetts, where our corporate headquarters. We also have, manufacturing in Chelmsford, Mass, which is large you know, largely in our aerospace and defense manufacturing. And then we’ve got a factory in Limerick.

And those are the in That’s Ireland. In Ireland. Yes. Sorry. Limerick, Ireland.

And then most of our back end is in is in Asia. You know, our internal back end capacity is in The Philippines, Thailand, and Malaysia. And then we’ve got various partners on the on the front end from a foundry perspective. You know, obviously, you know, our largest, foundry partner is the big one in Taiwan. And and we have multiple OSATs across the Asia Pac region.

So if you think about, you know, end assembly and test is largely outside The US. Okay. And wafers are spread across

Stacy Rasgon, Analyst, Bernstein: The US, Ireland. But pretty diversified, like, in terms of a global footprint?

Rich Puccio, CFO, Analog Devices: Yes. And and and that will that potentially is could be critically important as we move forward depending on how things shift in the macro and

Stacy Rasgon, Analyst, Bernstein: the geopolitical. And then and I guess what about, like, from an in demand standpoint? So your your China revenue, if I it was a I don’t 20% something. It’s it’s lower, I think, than than some of your peers.

Rich Puccio, CFO, Analog Devices: It is. I think our China revenue is is we’re China revenue is about third is is about 20%. We ship in headquarters is yeah. By headquarters, it’s 20. By ship in, it’s it’s about 30.

Got

Stacy Rasgon, Analyst, Bernstein: it. Oh, no. That that makes sense. Do you guys have a lot of companies that talk about, like, a China for China strategy just given to you. Do you have anything like that, or, like, how do you think about that?

Rich Puccio, CFO, Analog Devices: So we sorry. I think I might maybe I said this. I if I didn’t. We have, we have, design and sales teams in China, and then we have, some manufacturing capacity in China. The majority of our stuff is not manufactured in China, but we do have China manufacturing capabilities Got it.

Got it. Okay. With a partner, not not our manufacturing. Okay. So,

Stacy Rasgon, Analyst, Bernstein: like, do have, like, you have, like, local foundry partners in China? Yes. Okay.

Rich Puccio, CFO, Analog Devices: Yes.

Stacy Rasgon, Analyst, Bernstein: Got it. What are your broad thoughts just on the current, like, China demand situation? Because it seems like we we’ve seen, like, I think auto strength has been pretty good in China, not not so strong in auto, like, elsewhere. Industrial maybe is, hit or miss, although maybe that’s certainly back. Like, what are what are your your broad thoughts on that?

And have you seen any impact just given everything that’s going on So

Rich Puccio, CFO, Analog Devices: interesting. China has was the first to go into the downturn for us. It’s been the first to come out. You know, we have posted very strong results in China for three straight quarters. A big chunk of that has been has been the auto demand in China.

But one of the interesting things in which I think is an important part of this recovery is we saw a pickup in all of the end markets in China in the second quarter. So, when we when we look at that, you know, that that that is a big change because we were we were still at least 50% off our highs in all of the end markets in China except for auto. So now starting to see some growth in the in the broader mark you know, our our footprint in China is very similar to our global footprint. So, you know, seeing growth in the industrial in China is a good strong signal that we’re, you know

Stacy Rasgon, Analyst, Bernstein: Still off the highs, though.

Rich Puccio, CFO, Analog Devices: Still off the highs, but a good signal that we’re starting that cyclical upturn that we talked about. You know? And the other thing is and when we looked at it, if you just look at the broad macro demand you know, we we exited the quarter with book to bills above one in all the geographies and and and essentially almost all of our end markets. I think we were slightly below on auto but almost at parity. So really strong Okay.

Exiting the quarter from a a demand perspective in what we’re seeing.

Stacy Rasgon, Analyst, Bernstein: Got it. You know, your your your larger peer in China has been rumored to be being very aggressive on price. I think there’s a view that ADI is maybe less exposed to pricing and competitive pressures, particularly in China given the nature of the portfolio and the value out of the product. Would would you agree with that statement? And, like I said, what what have you been seeing regarding the the competitive environment both with local competitors as well as the multinationals in in China?

Rich Puccio, CFO, Analog Devices: So I would say from a pricing perspective, China is clearly the most competitive place. Mhmm. We are not exempted from that competition. I do think that what gives us, the ability to withstand some of that competition is one, we tend to play at the we play more at the higher end of the spectrum from a performance and value perspective. We tend to be try to be first into a solution where we can leverage our domain expertise.

And on top of that, you know, we we add, you know, our our our our local knowledge and our analog knowledge, which we have a significant amount of history on, to be able to capture that high end. And the other thing that we’re doing is getting more of the system value or driving system value. So that’s that’s a place where we play a ton.

Stacy Rasgon, Analyst, Bernstein: What what does that mean? Is that, software?

Rich Puccio, CFO, Analog Devices: Or is, like, what is that? So it is it is software. It’s also the ability to help integrate into various systems and allow them to perform better because of the Jeff likes this word, the elegance of our solutions. But the other piece of it is, you know, I guess, two other pieces to back to your how we’re protected on this is, one, our footprint there is very similar globally, so it’s, you know, 70 plus percent is industrial and auto, highly fragmented, very, very in industrial in particular, very sticky life cycle products. So that’s a hard area to attack.

And and certainly, the design in phase, the price competition is significant. But we do continue to win there, and we’re also still continuing to capture about forex the industry ASPs. Okay. Now part part of what happens What

Stacy Rasgon, Analyst, Bernstein: are the industry ASPs now? Rough number, 40¢. Is that okay?

Rich Puccio, CFO, Analog Devices: And so the other piece of it is if you go to the other end of the spectrum, you know, a lot of the capacity that’s being built both locally in Texas by sorry, in China by the local Chinese companies and also what TI has said they’re building over there is much more of the higher volume SKUs. You know, our game, as we’ve talked about, has not been to try to pump out as much silicon as we can. It’s to go after the value capture. So you look at the, catalog type parts. You know, that that’s just not a place that we’re equipped to compete with somebody like TI given their manufacturing model and their efficiency.

So we don’t tend to play a lot in that space. And where you’re starting to see, you know, the the local Chinese competitors pick up is is in that space, But we are relentlessly paranoid because they will they they move fast, and they’re very aggressive, and they will continue to try to work their way up into the higher functions. So our our our continued drive, and you see this in how we spend our money, is to continue to drive innovation and maintain our leading analog, franchise.

Stacy Rasgon, Analyst, Bernstein: How much of what you sell into China is is maybe replicable by current, Chinese skill sets and capabilities. It sounds like you think that those skill sets are evolving and advancing. So, I’m curious what that might look like in five years or even ten years because, clearly, you know, they’re they’re being forced into it. Right? The Chinese are putting a lot more resource.

They have no choice. They’re building a lot of capacity. They’re gonna

Rich Puccio, CFO, Analog Devices: have to fill it with something. How do you

Stacy Rasgon, Analyst, Bernstein: think, like, longer term And and and, again, there’s a perception at least that ADI may be more insulated from it because of the thing.

Rich Puccio, CFO, Analog Devices: Well, I I think that the the I I always careful to use insulation because I think the threat is real for everybody. I think it is, it is our technological performance advantage and our service advantage that helps protect us. I think that we have a lead of some amount because of our long history and experience, and designing an analog is hard. And just building capacity doesn’t mean you can supply everything, you know, that folks need. But I think we have to continue to invest to stay ahead of that or they will, you know, continue to take more and more of that market away from us.

But I think we have a lead. I think it’s hard for them to replicate. Where we’ve seen them take take business in China has tended to be in areas where the performance requirements aren’t as high. And if it gets into a, you know, it’s just okay, then you might pick China. But if and this applies around the world.

If you want the highest performance, you’re gonna still pick the analog. And and we even in this super price competition, we are still accelerating growth in our design wins.

Stacy Rasgon, Analyst, Bernstein: It it makes sense. I presume even with price competition, you’re coming in above. Right? I mean, so there’s there’s been a a bigger push. I mean, Vince used to talk about this push more toward value pricing.

Sort of more verse more than where where you were, you know, years ago.

Rich Puccio, CFO, Analog Devices: Yeah. And then and we are like I said, we are super super focused on, capturing what we get from that innovation and being first. Got it. Now I I

Stacy Rasgon, Analyst, Bernstein: guess the same question, like, on the on The US side. So, again, you got a competitor that’s building an absolute ton of capacity here in The US. And and while that competitor, I believe, actually is actively losing share in in China, you can look at they’ve kind of admitted it. They’ve suggested that, like, in The US, they’ll they think it’ll sort of, like, more than make up the difference. And how much of a threat is just like I’m I’m and they’re building, I don’t know what it is, six death stars or whatever it is in Texas and and Utah.

Like like, how do you think about that? And and is there a need over time for ADI to actually be more aggressive about actually being building out here in The US?

Rich Puccio, CFO, Analog Devices: I I would say in the near term, building incremental fab capacity is is not on the table. If you think about what we’ve done over the last You built up Beaverton a bit. And Well, we’ve we essentially we’ll have doubled by the end of this year, we’ll have doubled our internal factory capacity from where we were. And so given you know, if you if you do an outlook on our where our revenue’s headed and from a growth perspective, we feel very comfortable about the factory footprint we have today. You know you know, obviously, we we are we only build, you know, at a certain lithography in our internal factories.

But today, based on the demand we see going forward, we feel very good about where we are from a capacity perspective. Got it. And same thing. You know, The US that I said about China is, you know, going after the hardest problems to solve. And, you know, one of the things that happened during the pandemic is we got really close to customers.

And so what we find now is they come to us very early in their process and say, we have this really hard problem. We need you to solve it. And, you know, one of the things we hear pretty consistently from customers is you’re doing an amazing job. We love all the work you’re doing for us. We want you to do more because they’re hard, complex problems, and they wanna get them solved.

And so that has helped us tremendously get out in front of some of these, you know, future design design ins and design wins because they bring us in early because we have you know, my old boss, and I I think I said this before, my old boss said there’s no compression algorithm for experience. We’ve got sixty years of analog experience so we can solve the hardest problems.

Stacy Rasgon, Analyst, Bernstein: Is that is that the basically, the simple answer to the question of, like, how do you compete? Because, like, I you know, most of the others, I mean, at least the the big US guys would sort of say similar. TI has been around a hundred years. Almost. Yeah.

A hundred. You know? But what what is it that ADI does differently even from, like, the large established guys that would probably try to make the same claim? I think

Rich Puccio, CFO, Analog Devices: if you look at them, I I think from a relative spend perspective, we invest we invest more of our our money in r and d. What’s your r and d for ’20 This year, it’s a it it was about it’s running about 17% right now. Right? So we tend to run you know, it’s a little bit different. Our our first call on capital is r and d Mhmm.

Versus, you know, hardcore capital assets. Mhmm. Now we had a a run here for a couple years that we’ve spent a ton on on on capital.

Stacy Rasgon, Analyst, Bernstein: But as we’ve went to what? Are you at 8% or 10% of revenue?

Rich Puccio, CFO, Analog Devices: Might have tweaked close to 10% at one point, but you know? And we’ve we’ve told everybody we expect to get back down into that four to 6% range. Not 30. Right. No.

No. It is not. No. And and and our team is is very prudent in the way they deploy capital. But this this three year period was significant for us.

Our customers wanted resiliency, and at some level, you know, they’re willing to pay for that resiliency. And we see and we see that. So it’s been an important thing, but it goes back to how much we spend. We have a significantly higher number of engineers than we had three years ago. Right?

And and we have more engineers in more disciplines. So we’ve hired lots of software people, lots of digital people, and we are ramping up our hiring around AI. We’ve been hiring for a while because we think that the ability to extract more value out of the core analog franchise comes from having the right digital and and software companions.

Stacy Rasgon, Analyst, Bernstein: So when you say you’re investing in AI, is that investing in, like, AI from a product standpoint or AI from, like, you’re using it for yourselves or both?

Rich Puccio, CFO, Analog Devices: Both. So you think about we’re we’re we’re using it at the enterprise level. We’re using it at the engineering level from a use of it, but we’re also deploying it into product. Right? Because if you think about the the current big AI build is infrastructure and its data centers, and we’re benefiting for that.

Lots of companies are benefiting.

Stacy Rasgon, Analyst, Bernstein: What do you and what do

Rich Puccio, CFO, Analog Devices: you do there, by the way? So for us, our today, our our our primary exposure is just, obviously, our test business benefits for all the testing around the high performance compute and high bandwidth. But if you go into the data centers, you know, they have our, you know, hot spot power products in there. And then we’ve talked about the new wins where we’ve got vertical power that’s coming online at one of the hyperscalers and it starts shipping for us in the fourth quarter. And then we’re already shipping an optical module that’s going to go into one of the large high performance compute companies.

So those are the primary areas today in the infrastructure exposure for us. Mhmm. But as we think forward to AI at the edge, right, so that’s this that’s transitioned from large language models more to small language models out at the edge. So being able to do compute closer to where the physical signals meet the digital. What what would you

Stacy Rasgon, Analyst, Bernstein: be selling into that? For instance,

Rich Puccio, CFO, Analog Devices: you know, think about it. You know, I’ll I’ll give a couple of examples. One that we’re already doing is Mhmm. Noise cancellations for hearing aid. Mhmm.

That sound is incredibly dynamic. If you have a fixed algorithm in the in the earpiece, you don’t you can’t react as well. We are now shipping with dynamic algorithms, you know, mini AI in the the the say again? Neural nets. Neural nets so that you can dynamically react to get better noise cancellation.

Another example, if you think about where, you know, factory automation is moving and robotics and the increased, you know, need for that. Of course, as we build more and more factories, there’s not enough people to fill them. You need more robotics. But you think about some of the challenges you face with robotics is power consumption. Right?

It’s latency. Right? If you’ve got a robot that’s gotta react, that’s gotta you want it and security. Well, so having the compute at the edge in in at the on the device reduces power consumption, reduces latency, and increases security. So the opportunity to build those things into our chips so that in a robot, you can do the compute at the edge where the sensing and the physical data is gathered.

So I think that is a and you’ve heard Vince talk about this I think that is a really big opportunity for us in the next gen of AI is getting AI into our products out at the edge edge. So it’s interesting. Like, you know, on

Stacy Rasgon, Analyst, Bernstein: on each earnings call, Vince, like, he he, you know, he picks a topic, and he kinda goes into it a little more depth. And I heard him talking about space, and he talked about robotics and AI and health care. What are the areas that that you guys, I I guess, collectively would be most excited about? Or do I just go back and, like, listen to to the last, like, earnings calls that that what what Vince called out

Rich Puccio, CFO, Analog Devices: in I think Vince I think Vince does a great job calling things out. You know, if if you think about the the some of the broad global trends, you know, our our ability to help with the energy transition is super exciting. You know, think about some of the products we’ve developed in the automotive space for battery management, grid management type potential. Right? The grids around the world are old and in need of update.

Stacy Rasgon, Analyst, Bernstein: Technology, by the the battery management systems auto that you’re doing versus grid?

Rich Puccio, CFO, Analog Devices: Same same concept. Uh-huh. Yes. And but it’s also, you know, we’re, you know, we’re we’re looking at other ways to help them do more intelligence of the sensing on the grid, right, so that they can better manage what they have. So that’s a tremendous opportunity.

We’ve talked a lot about robotics, but for us, you know, that continues to be significant, one, because of the need for incremental robotics and, two, the change. Right? You’ve we’re moving from we moved from fixed, and now we’ve got autonomous, and now we’re gonna have the humanoid robot. Every move that way is more content for us. So that, you know, that is super exciting from us for us, as we look forward.

You know? And then and one of one of the one of the parts of the business that has been slow and we’ve started to see it finally grow is is automation. And going forward, again, following those trends of factory automation, you know, we think that’s a huge opportunity for us going forward.

Stacy Rasgon, Analyst, Bernstein: Is that sort of where the incremental R and D dollars are going right now?

Rich Puccio, CFO, Analog Devices: So we so we spend our you know, it’s interesting. We spend a significant amount of our R and D just on our core analog portfolio. And then we’re looking across what are the most impactful areas and where do we spend our r and d, and we’re targeting our incremental r and d across these megatrends to make sure we’re capturing that going forward. What what do you guys do on

Stacy Rasgon, Analyst, Bernstein: the digital side, if anything? I I know you used to have a DSP business. You never talk about it.

Rich Puccio, CFO, Analog Devices: I don’t even know if

Stacy Rasgon, Analyst, Bernstein: it’s there anymore. But is there anything you do, like, on the digital? I mean, a lot of what you do also be, like, not maybe it’s not pure analog. Maybe it’s, like, more what people call mixed signal. Like, I don’t I don’t know.

Rich Puccio, CFO, Analog Devices: We well, so we’re we’re continuing to actually on on the on the digital and software side to develop, products to go on to to go into our in enhance our existing chips. We we do have the mixed signal stuff that you that you mentioned, but we’re also working on, more compute type products, I would say. Good. Okay. Yeah.

You know,

Stacy Rasgon, Analyst, Bernstein: you don’t talk about it anymore, but it’s

Rich Puccio, CFO, Analog Devices: It’s harder to move the needle when you get to be over 10,000,000,000, Stacy.

Stacy Rasgon, Analyst, Bernstein: I I hear you. I hear you. Can you talk about the shift? You you ADR was one of the few companies that actually did attempt to be a consolidator in in analog. And, you know, I think there was a lot of hesitancy to believe that there was value to be added to this idea that, like, we can’t get cost synergies because you you want you don’t wanna fire the engineers.

And I I think you guys have kinda proven over the years that this that this can work. And you’ve bought, at least in my history, least at least three companies that we know, that was Hittite, which was

Rich Puccio, CFO, Analog Devices: more of a

Stacy Rasgon, Analyst, Bernstein: bolt on at the time, but reasonably sizable and went well. And then

Rich Puccio, CFO, Analog Devices: An an amazing technology that actually worked on their IPO. Yeah.

Stacy Rasgon, Analyst, Bernstein: Oh, really? It’s looks like it’s gone very well. And and then linear, clearly, which was you know, that was sort of the the first, like, really big swing, and and then more recently, Max. And then even the timing on Max was really interesting. When you it was 2020, I think, when you announced it.

Right? Yeah. In hindsight, that was actually good timing. But I guess, how was that decision made? Like like, why was the decision made to go out and and and be a consolidator?

And I guess, the other side of that, why is M and A now no longer needed? Is it just that you can’t or or that you don’t want to?

Rich Puccio, CFO, Analog Devices: So so I I’ll go back to the beginning. I don’t I don’t think we’ve made a decision. I know we haven’t made a decision to move away from M

Stacy Rasgon, Analyst, Bernstein: Well, I I mean, there was a decision that, like, you you post MAX, I mean, maybe this doesn’t hold anyway. Don’t know. MAX are gonna return a % of cash.

Rich Puccio, CFO, Analog Devices: We we did say post MAX, and we would, over the long term, try to return a % of our free cash flow. And I talked a little bit about we didn’t do that last year. That was pretty conscious given all the turmoil. We were trying to make sure we had a little bit of liquidity. We are very happy

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