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    ADI
    Earnings call· Feb 2025(Q1 FY25)

    ANALOG DEVICES INC ADI

    Feb 19, 2025 Source

    Executive summary

    Analog Devices Q1 FY25 — Cyclical Trough Passed, Growth Expected in 2025

    Analog Devices reported Q1 FY25 results above expectations, signaling a recovery from the semiconductor downturn with sequential and year-over-year growth. The company is confident in returning to its long-term growth model in 2025, driven by normalizing inventory levels, improving bookings, and new product cycles across diversified end markets. Strategic investments in hybrid manufacturing and dual sourcing are enhancing resilience amidst an uncertain macro environment.

    Highlights

    5

    • Q1 FY25 revenue, profitability, and adjusted EPS finished above the midpoint of outlook, with adjusted EPS at $1.63.

    • Increased quarterly dividend for the 21st consecutive year by 8% to $0.99 per share.

    • Net leverage ratio decreased to 1.1 at the end of Q1 FY25.

    • Bookings strength was driven by industrial and automotive, with a positive book-to-bill during Q1 FY25.

    • Board authorized an incremental $10 billion for share repurchases, bringing total remaining authorization to $11.5 billion.

    Concerns

    4

    • Consumer revenue declined 15% sequentially in Q1 FY25 due to seasonal weightage.

    • Wireless revenue continues to experience demand challenges.

    • Days of inventory increased to 176 in Q1 FY25, though channel weeks remained below the target of 7 to 8 weeks.

    • Geopolitical turmoil and trade wars are cited as incalculable factors that could govern the rate of recovery.

    Guidance & targets

    6
    CategoryTargetConfidence
    Revenue
    $2.5 billion, plus or minus $100 million
    high materiality
    High
    Non-GAAP Operating Margin
    40.5%, plus or minus 100 basis points
    medium materiality
    High
    Tax Rate
    11% to 13%
    low materiality
    High
    Adjusted EPS
    $1.68 plus or minus $0.10
    high materiality
    High
    Capital Expenditure
    Decrease from '24 and fall within 4% to 6% of revenue
    medium materiality
    High
    Long-term Model Growth
    7% to 10%
    high materiality
    High

    Segment performance

    4
    SegmentRevenueYoYQoQMargin
    Industrial
    Grew sequentially for three straight quarters. Stronger demand in automatic test and aerospace and defense (up year-over-year). Stabilization across automation, health care, and energy. Pickup in broad market drove much of the upside relative to initial expectations.
    Revenue as % of total: 44%
    		$1.06 billion—1%—
    Automotive
    Revenue came in better than expected, driven by Asia, with continued strength in China EV OEMs. Leading connectivity and functionally safe power solutions up double digits year-over-year, reflecting secular content growth and greater share position. GMSL portfolio outpacing ADAS growth, A2B and functionally safe power franchises also showing similar growth trajectories. BMS poised to return to growth in FY25.
    Revenue as % of total: 30%Connectivity and functionally safe power solutions growth: double digits year-over-year
    		$0.73 billion—2%—
    Communications
    Wireline business, making up roughly two-thirds of total communications, was up double digits sequentially and year-over-year, driven by data center infrastructure buildouts fueled by AI demand. Wireless revenue continues to see demand challenges.
    Revenue as % of total: 12%Wireline revenue growth: double digits sequentially and year-over-yearWireline as % of total communications business: roughly 2/3
    		$0.29 billion—6%—
    Consumer
    Finished down sequentially due to seasonal weightage. Design wins in premium handsets, hearables, wearables, and gaming systems began to drive robust diversified growth in H2 FY24, with more content expected in upcoming launches, leading to an expected strong year ahead and beyond.
    Revenue as % of total: 13%
    		$0.31 billion—-15%—

    Operational metrics

    13
    Non-GAAP Gross Margin
    68.8%up 90 bps sequentially
    Q1 FY25

    Non-GAAP gross margin for the first fiscal quarter.

    Non-GAAP Operating Expenses
    $687 millionup $32 million sequentially
    Q1 FY25

    Non-GAAP operating expenses for the first fiscal quarter.

    Non-GAAP Operating Margin
    40.5%
    Q1 FY25

    Non-GAAP operating margin for the first fiscal quarter.

    Non-operating expenses
    $58 million
    Q1 FY25

    Non-operating expenses for the first fiscal quarter.

    Tax Rate
    11.8%
    Q1 FY25

    Tax rate for the first fiscal quarter.

    Net Leverage Ratio
    1.1decreased
    Q1 FY25

    Net leverage ratio at the end of the first fiscal quarter.

    Inventory
    $27 millionincreased sequentially
    Q1 FY25

    Inventory increased sequentially to replenish the die bank of fastest-turning products.

    Channel Weeks
    below targetmoved lower
    Q1 FY25

    Channel weeks remained below the company's target range.

    Capital Returned to Shareholders
    >$2.4 billion
    TTM

    Total capital returned to shareholders over the trailing 12 months.

    Dividend Increase
    8%
    Q1 FY25

    Increase in quarterly dividend per share, marking the 21st consecutive year.

    Share Repurchase Authorization
    $10 billionincremental
    Q1 FY25

    Incremental authorization for share repurchases by the Board, adding to the existing program.

    Bookings Strength
    driven by industrial and automotive
    Q1 FY25

    Bookings strength was primarily observed in the industrial and automotive end markets.

    Inventory Reduction from Channel
    $300 million
    FY24

    Significant amount of inventory taken out of the channel during fiscal year 2024, primarily impacting the industrial market.

    Industry KPIs

    12
    MetricValueDetails
    EPS$1.63
    Gross margin68.8%%
    Free cash flow$3.2 billionUSD
    Operating margin40.5%%
    Operating expenses$687 millionUSD
    Operating cash flow$3.8 billionUSD
    Revenue growth rate$2.42 billionUSD
    Cash investments balance$2.7 billionUSD
    Inventory channel inventory176days
    Rpo backlog bookings orderspositive
    Share buyback capital return>$2.4 billionUSD
    Segment end market revenue mixIndustrial: 44%; Automotive: 30%; Communications: 12%; Consumer: 13%%

    Orderbook & backlog

    2
    Book-to-billpositiveQ1 FY25

    Reflects overall order improvement during the quarter.

    Bookings strengthdriven by industrial and automotiveQ1 FY25

    Indicates strong demand in the two largest end markets.

    Product announcements

    2
    ProductTypeDetails
    1.6 Terabit Optical Modulelaunch
    Vertical Power Solutionslaunch

    Risks & headwinds

    3
    Challenging Macro and Geopolitical EnvironmentFY25

    incalculable effect

    Mitigation: Diversity of markets, products, customers, and geographies; dual sourcing for 95% of products by end of '26/early '27.

    Wireless Revenue Demand ChallengesQ1 FY25 and ongoing

    continues to see demand challenges

    Competitive Market in Chinaongoing

    competitive market, particularly at the kind of mid-low ends with indigenous suppliers

    Mitigation: Focus on high-performance technologies and system-level capabilities where ADI is well-compensated.

    What to watch in Q2 FY25

    5

    Industrial Market Growth

    Q2 FY25 and beyond
    CurrentUp 1% sequentially in Q1 FY25, expected to lead growth in Q2 FY25
    TargetContinued acceleration and sustained growth

    Why it matters

    Industrial is ADI's largest end market, and its recovery is key to overall company growth and cyclical turnaround.

    For Q1 specifically, and we've talked about this in a couple of quarters, we saw continued strength in ADAS and the automatic test equipment. And then what we started to see from a positive perspective is stabilization across automation, health care and energy, which I think has been important.

    Q&A highlights

    6

    How does the strong growth in the China auto market, particularly with EV OEMs, impact ADI's pricing, margins, and total addressable market?

    Management confirmed strong results in Asia, especially China EV OEMs, driven by ADI's leading connectivity, functionally safe power, and BMS solutions. They noted that ADI's high-performance technologies remain relevant and well-compensated, even in a competitive market with indigenous suppliers, due to the quality and system-level capabilities provided.

    “As long as there is a market for high-performance technologies, that ADI's technologies would continue to be relevant, and that is the case. We see it in automotive. We see it in the industrial sector, the cloud, communications, and we're getting well paid for the quality of the technologies that we're bringing.”

    asked by Joseph Moore · answered by Vincent Roche

    2 min read5 chapters

    Detailed Narrative

    01

    Market Recovery and Inventory Normalization

    Management believes the semiconductor industry has passed its cyclical trough, with ADI well-positioned for sustained recovery. This view is supported by lean channel inventories and gradual bookings improvements over the past 18 months. Inventory levels have largely normalized across both direct and distribution channels, and across most business segments, including industrial and the broad market, indicating improved demand signals and a balance between supply and real demand.

    02

    Strategic Manufacturing and Resiliency

    Analog Devices has strategically invested in enhancing its hybrid manufacturing model to support dynamic customer needs and ensure supply chain resiliency. By the end of fiscal 2026 and early 2027, the company expects to have secured at least dual sourcing for 95% of its product chain. This initiative, alongside investments in internal fabs in America and Europe and securing additional supply from external partners, aims to desensitize geographic centricity and mitigate geopolitical risks.

    03

    AI-Driven Opportunities and Product Innovation

    AI infrastructure buildouts are a significant growth driver for ADI, particularly in communications and automatic test equipment. The company's high-precision electro-optical controller is now shipping in a 1.6 terabit optical module for AI systems, and high voltage power path protection systems are on a strong growth trajectory. ADI also plans to begin shipping vertical power solutions to hyperscalers later in fiscal 2025, with additional designs expected in 2026, demonstrating increasing content and ASP capture in AI-related applications.

    04

    Diversified End Market Performance and Design Wins

    ADI is seeing robust demand across several diversified end markets. In automotive, the GMSL portfolio, A2B, and functionally safe power franchises are expected to achieve record-breaking years in 2025, with BMS poised to return to growth driven by wireless solutions. Industrial automation, surgical robotics, and aerospace & defense are also contributing to double-digit growth in 2025, fueled by new design wins and product ramps that leverage ADI's high-precision solutions and increased content per system.

    05

    Capital Allocation and Shareholder Returns

    Analog Devices continues its commitment to shareholder returns, increasing its quarterly dividend by 8% to $0.99 per share, marking the 21st consecutive year of increases. The board has also authorized an incremental $10 billion for share repurchases, bringing the total remaining authorization to approximately $11.5 billion. The company targets 100% free cash flow return over the long term⏳, allocating 40% to 60% for dividends and the remainder for share count reduction.

    AI-generated summary of the company’s earnings call. Not investment advice.