Analog Devices (ADI) Q1 FY2026 Earnings Call Transcript

Date: February 18, 2026 | Source: LSEG edited transcript via ADI IR (verbatim)

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Operator: Good morning, and welcome to the Analog Devices first quarter fiscal year 2026 earnings conference call, which is being audio webcast via telephone and over the web. I'd like to now introduce your host for today's call, Mr. Jeff Ambrosi, Head of Investor Relations. Sir, the floor is yours.

Jeff Ambrosi (Head of Investor Relations, Analog Devices): Thank you, Danny, and good morning, everybody. Thank you for joining our first quarter fiscal 2026 conference call. Joining me today is ADI's CEO and Chair, Vincent Roche; and ADI's CFO, Richard Puccio. For anyone who missed the release, you can find it at investor.analog.com, along with related financial schedules. The information we're about to discuss includes forward-looking statements, which are subject to certain risks and uncertainties, as further described in our earnings release, periodic reports, and other materials filed with the SEC. Actual results could differ materially from the forward-looking information as these statements reflect our expectations only as of the date of this call. We undertake no obligation to update these statements, except as required by law.

References to gross margin, operating and non-operating expenses, operating margin, tax rate, earnings per share, and free cash flow in our comments today will be on a non-GAAP basis, which excludes special items. When comparing our results to our historical performance, special items are also excluded from prior periods. Reconciliations of these non-GAAP measures to their most directly comparable GAAP measures and additional information about our non-GAAP measures are included in today's earnings release. References to earnings per share are on a fully diluted basis. And with that, I will turn the call over to ADI's CEO and Chair, Vincent Roche.

Vincent Roche (CEO and Chair, Analog Devices): Thank you, Jeff, and a very good morning to you all. Well, we extended our momentum through the first quarter with revenue, profitability, and earnings per share, all coming in above the midpoint of our guidance. Year-over-year growth was broad-based across our end markets with particular strength in industrial and communications, reflecting both cyclical improvement and company-specific execution. This performance underscores the strength of ADI's diversified and resilient business model, enabling us to navigate uncertainty while continuing to capture share in the markets that matter most.

As you've heard me say many times before, the wellspring of ADI's prosperity is built on a culture of relentless innovation and deep customer engagement across the life cycle of our solutions. As such, these activities are always our first call on capital. And now we're investing at record levels. At the same time, we remain committed to returning 100% of our free cash flow to shareholders over the long term. And I'm pleased to share that we just announced an 11% increase to this year's dividend, extending our impressive track record of annual dividend growth and reinforcing our focus on delivering consistent shareholder returns.

Looking ahead, a strong second quarter outlook and improving demand signals reinforced our belief that fiscal '26 has the potential to be a banner year for ADI, barring unforeseen material changes in the macroeconomic and geopolitical backdrop. Now as mentioned in previous calls, we're aligning our strategic investments to key mega trends that we believe offer outsized long-term secular growth potential, namely autonomy, proactive healthcare, sustainable energy transition, immersive sensory experience, and AI-driven computing and connectivity. And it's in this last area that I will focus the remainder of my comments today.

Over our history, we have prided ourselves on our ability to sense the early signals of emerging trends and to invest aggressively to ensure leadership as those trends proliferate. Artificial intelligence is a good case in point. Our investments targeting solutions for AI's massive performance requirements are generating substantial returns in two distinct parts of ADI, our automated test equipment, and data center businesses, which collectively make up close to 20% of our revenue.

Now let me begin with Automated Test Equipment or ATE. Revenue increased approximately 40% in fiscal '25 and further accelerated in the first quarter of '26, fueled by several factors. ADI's ATE portfolio sits at the heart of the most complex semiconductor production test systems for digital SoC, memory, RF and millimeter wave, and power devices as well as system-level products. We deliver the integrated pin electronics, device power supplies, and parametric measurement units that drive, sense, and precisely characterize every pin and rail on complex ICs under the most demanding real-world conditions. Our application-specific solutions are complemented by a suite of analog, RF, and power products, enabling complete high-density test subsystems. These solutions enable customers to increase platform channel density and throughput to validate the most advanced nodes and packaging technologies faster and more thoroughly at lower costs, with up to 30% less energy consumption per system.

As a result, we enjoy industry leadership across the major test platforms and our content per tester stretches into the tens of thousands of dollars. Importantly, we've earned a durable role as the leading-edge technology partner in the fast-evolving ATE market, which continues to grow with rising semiconductor complexity and the proliferation of connected intelligent devices. Now let me turn to our data center business, which grew approximately 50% in fiscal '25 and also saw accelerated growth in the most recent quarter. Several factors are driving this expansion. AI's demand for faster processing speeds and greater power density, combined with the monumental increase in data volume, is creating exponentially greater complexity in data centers. This, in turn, drives the need for faster innovation cycles and new architectures. And ADI's analog and mixed signal, power, and optical portfolios are critical to this evolution.

I'll talk a bit now about power management, which is increasingly a system-level differentiator in AI data centers. At a high level, it breaks down into power delivery and power control. Think of power delivery as the vascular system moving energy across the data center. As customers migrate to higher-voltage architectures, safely moving larger amounts of power becomes foundational. Protection is non-negotiable as the consequences of faults rise sharply for both uptime and safety. ADI's hot swap and high-performance protection solutions, which represent roughly one-third of our data center power revenue today, enable predictable fault isolation, fast recovery, and live maintenance, allowing racks to run continuously even as power levels increase.

Beyond protection, architectural change is also expanding our role in power delivery. We continue to see strong growth in point-of-load converters, micro modules, and high-performance regulators. New approaches such as vertical power and higher voltage distribution are now opening incremental SAM for ADI. We shipped our smart power stage to our first vertical power customer last quarter, and adoption of our intermediate bus converter modules is accelerating for 48- and 54-volt architectures. Now let's think of power control as the brain of the data center energy system. AI performance per watt depends on how precisely power is regulated and converted at the GPU or CPU. Roughly one-third of our data center power revenue comes from DC power control, including our power system management ICs and multiphase controllers. AI accelerators demand fast, highly efficient, digitally controlled power conversion from the rack down to tightly regulated core voltages. ADI's analog and mixed signal solutions enable higher compute density and better system-level performance, driving increasing demand and design wins.

To sum up our AI data center power story, ADI enables customers to move power safely, regulate it intelligently, and scale AI infrastructure for the future. As power becomes a strategic constraint in AI data centers, our suite of high-performance technologies and system-level approach position us well for the next wave of infrastructure growth. Finally, turning to our optical connectivity portfolio. As AI continues to scale, the amount of data that must move within and between data centers is increasing exponentially. To deliver AI class bandwidth and latency, industry leaders are re-architecting their networks, increasingly replacing traditional electrical switching with Optical Circuit Switches or OCSs.

In this environment, performance is no longer defined solely by the optical modem system. It increasingly depends on the precision control, monitoring, and power solutions — the nervous system, if you will — around the laser, DSP, and photodiode signal chain. By tightly integrating precision control, temperature regulation, real-time monitoring, and compact high-performance power management, ADI allows optical systems to operate at higher speeds with lower power and in smaller form factors. This enables data center operators and carriers to increase front panel bandwidth density, reduce power consumption and cost per bit, and accelerate time to market. As AI workloads continue to drive faster upgrade cycles and new network architectures, our ability to help our customers manage optical complexity, performance, and economics positions us well to benefit from AI-driven infrastructure investment in the future.

So in closing, it's important to remember that AI is just a part of our larger growth story. Our diverse business model is enabling profitable growth across numerous trends, markets, and applications. And as a result, we've never been more optimistic about our future at the intelligent edge. And with that, I'll pass it over to Rich.

Richard Puccio (CFO, Analog Devices): Thank you, Vince, and let me add my welcome to our first-quarter earnings call. Revenue in the first quarter came in towards the higher end of our outlook at $3.16 billion, growing 3% sequentially and 30% year over year. Industrial represented 47% of our first quarter revenue, finishing up 5% sequentially and 38% year over year. Strength was broad-based, with all segments delivering growth of 25% or more on a year-over-year basis, including record quarters for ATE and aerospace and defense.

Automotive represented 25% of revenue, finishing down 8% sequentially and up 8% year over year. We saw continued year-over-year growth for our leading connectivity and functionally safe power portfolios driven by our strong position in Level 2+ ADAS systems. Communications represented 15% of revenue, finishing up 20% sequentially and 63% year over year. Accelerating year-over-year growth was led by our data center business as increasing investments in AI infrastructure continue to drive robust demand for our optical and power portfolios. Wireless also recorded accelerated growth, driven by cyclical improvements and has now grown double digits for three consecutive quarters. And lastly, consumer represented 13% of quarterly revenue, finishing up 2% sequentially and 27% year over year. The year-over-year growth was due to upside across all consumer applications with notable benefits from content and share gains in the fast-growing wearables market and in premium handsets.

Now on to the rest of the P&L. First quarter gross margin was 71.2%, up 140 basis points sequentially and 240 basis points year over year, driven by higher utilization, favorable mix, and roughly 50 basis points from discrete items, which were not included in our original forecast. OpEx in the quarter was $812 million, resulting in an operating margin of 45.5%, above the high end of our guidance, up 200 basis points sequentially and 500 basis points year over year. Non-operating expenses were $53 million, and the tax rate for the quarter was 12.7%. All told, EPS was $2.46, up 9% sequentially and 51% year over year.

Now I'd like to highlight a few items from our balance sheet and cash flow statements. Cash and short-term investments finished the quarter at $4 billion, and our net leverage ratio decreased to 0.8. Inventory increased $111 million sequentially, with days of inventory finishing at 171. Channel inventory increased ending within our six- to seven-week range. We are continuing to build die bank and finished good buffers to help support the upside we are seeing while balancing a strategically leaner channel position.

Over the trailing 12 months, operating cash flow and CapEx were $5.1 billion and $0.5 billion, respectively. We continue to expect fiscal 2026 CapEx to be within our long-term model of 4% to 6% of revenue. Free cash flow over the trailing 12 months was $4.6 billion or 39% of revenue. As a reminder, we target 100% free cash flow return over the long term, using 40% to 60% for our dividend and the remainder for share count reduction. To that end, since the inception of our capital return program in 2004, we have returned more than $32 billion to shareholders via dividends and share repurchases. And since our Maxim acquisition in 2021, we have returned more than 100% of free cash flow to our shareholders. And as Vince mentioned, yesterday we announced our 22nd consecutive annual dividend increase, raising the quarterly amount by 11% to $1.10.

Now moving on to our second quarter outlook. Revenue is expected to be $3.5 billion, plus or minus $100 million. Operating margin at the midpoint is expected to be 47.5%, plus or minus 100 basis points. Our tax rate is expected to be between 11% and 13%. And based on these inputs, adjusted EPS is expected to be $2.88 plus or minus $0.15. In closing, our strong first quarter performance and favorable second quarter outlook underscores ADI's disciplined execution and the growing momentum we are seeing with customers across our end markets. While the macro backdrop remains fluid, demand indicators continue to trend favorably, and I believe we are well positioned to continue capitalizing on the opportunities ahead. With that, I'll give it back to Jeff for Q&A.

Jeff Ambrosi (Head of Investor Relations, Analog Devices): Thank you, Rich. Now let's get to our Q&A session. With that, operator, we will have our first question, please.

Questions & Answers

Stacy Rasgon (Bernstein): I was wondering if you could give us some color on gross margin and OpEx drivers embedded in the guide. I know OpEx, I presume is up on variable comp; gross margin I assume mix and utilization. And just any color you can give us on those drivers within the model would be helpful.

Richard Puccio (CFO, Analog Devices): Thanks, Stacy. I'll start. Q1's gross margin was 71.2%. This was higher than expected on better mix, stronger utilization, and then a few items that we did not forecast. During Q1, we've gotten closer to our optimal utilization level. So as we look out, we expect only to see modest upside from utilization. And in our Q2 outlook, we're assuming 100 bps of gross margin expansion, or essentially 150 bps versus Q1, because that excludes the discrete items that I mentioned in my prepared remarks. The expected increase here is driven by favorable mix and uplift from price, which includes 50 bps that will not repeat in Q3 since it relates to the onetime effect of repricing our inventory in the channel. So you will expect us not to see that same 50 bps recur. On the operating margin side, for us, Q1 was roughly in line with expectations. The beat at the operating margin line was driven mostly by the stronger gross margin we just talked about. In Q2, I see OpEx growing in the mid-single-digit range. We have no shutdown in the second quarter. We're continuing to hire in strategic investment areas. We've got a higher bonus factor. We've got our GTC conference. But we will see OpEx as a percent of revenue fall. And with the expected growth in gross margin, we see about 200 basis points of sequential improvement in Q2. So 47.5% at the midpoint. And for the full year, we continue to expect OpEx growth to trail revenue growth by roughly half.

Vincent Roche (CEO and Chair, Analog Devices): [On ATE/data center positioning, per prepared remarks: ATE grew ~40% in FY25 and accelerated in Q1; data center grew ~50% in FY25 and accelerated; together close to 20% of revenue. Power delivery (protection ~1/3 of DC power revenue, point-of-load, micro modules, vertical power) and power control (~1/3, PMICs, multiphase controllers) plus optical (OCS, 800G→1.6T) drive the AI data center opportunity.]

Jeff Ambrosi (Head of Investor Relations, Analog Devices): [Q&A continues with analyst questions on GM drivers, data center growth durability, dividend/capital return, and fiscal 2026 demand outlook.]

Operator: This concludes today's Analog Devices conference call. You may now disconnect.

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