ADI (2025 - Q3)

Release Date: Aug 20, 2025

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Stock Data provided by Financial Modeling Prep

Current Financial Performance

ADI Q3 2025 Financial Highlights

$2.88B
Revenue
+25%
$2.05
EPS
+30%
42.2%
Operating Margin
+1%
69.2%
Gross Margin

Key Financial Metrics

Industrial Segment Revenue

45% of total
23%

Automotive Segment Revenue

30% of total
22%

Communications Segment Revenue

13% of total
40%

Consumer Segment Revenue

13% of total
21%

Cash & Short-Term Investments

$3.5B

Net Leverage Ratio

1.1

Days of Inventory

160 days

Free Cash Flow (Trailing 12M)

$3.7B

Free Cash Flow % of Revenue

35%

Period Comparison Analysis

Revenue

$2.88B
Current
Previous:$2.64B
9.1% QoQ

Revenue

$2.88B
Current
Previous:$2.31B
24.7% YoY

EPS

$2.05
Current
Previous:$1.85
10.8% YoY

Operating Margin

42.2%
Current
Previous:41.2%
2.4% YoY

Gross Margin

69.2%
Current
Previous:67.9%
1.9% YoY

Industrial Segment Revenue %

45%
Current
Previous:44%
2.3% YoY

Automotive Segment Revenue %

30%
Current
Previous:32%
6.3% YoY

Communications Segment Revenue %

13%
Current
Previous:12%
8.3% YoY

Consumer Segment Revenue %

13%
Current
Previous:12%
8.3% YoY

Earnings Performance & Analysis

Q3 2025 Revenue vs Outlook

Actual:$2.88B
Estimate:High end of outlook
0

Q3 2025 EPS vs Guidance

Actual:$2.05
Estimate:High end of guided range
0

Financial Guidance & Outlook

Q4 2025 Revenue Guidance

$3.0B ± $0.1B

Q4 2025 Operating Margin Guidance

43.5% ± 1.0%

Q4 2025 EPS Guidance

$2.22 ± $0.10

Q4 2025 Tax Rate Guidance

11% - 13%

Revenue Breakdown by Segment

Q3 2025 Revenue by Segment

Industrial
45.0%
Automotive
30.0%
Communications
13.0%
Consumer
13.0%

Key Financial Ratios

Margins & Financial Metrics

69.2%
Gross Margin
42.2%
Operating Margin
11.9%
Tax Rate
35%
Free Cash Flow % of Revenue
1.1
Net Leverage Ratio

Surprises

Q3 Revenue Exceeds High-End Guidance

Above high-end guidance

$2.88 billion

Revenue came in above the high end of outlook, up 9% sequentially and 25% year-over-year.

Industrial Segment Growth Accelerates

12% sequential, 23% year-over-year

Industrial represented 45% of revenue and grew double digits sequentially and year-over-year, with growth across all subsectors and regions.

Gross Margin Slightly Below Expected 70%

Below expected by ~0.8%

69.2%

Gross margin was 69.2%, slightly below the anticipated 70% due to a one-time utilization disruption in a European fab.

Automotive Pull-In Shifted to China in Q3

Pull-ins in China vs. prior quarter in North America and Europe

Automotive pull-in orders in Q3 were primarily in China, differing from Q2 which was North America and Europe.

Supply Constraints in Aerospace and Defense

Capacity tooling lagging demand

Demand surging ahead of manufacturing capacity in aerospace and defense, causing supply constraints described as a high-quality problem.

Consumer Segment Fourth Consecutive Double-Digit Growth Quarter

21% year-over-year growth

Consumer segment grew 16% sequentially and 21% year-over-year, marking the fourth straight quarter of double-digit growth.

Impact Quotes

Our industrial automation business can double by 2030 driven by R&D strength, new robotics modalities, and macroeconomic pressures pushing manufacturing closer to consumption points.

The robotics content in humanoid robots is likely to be 10x that of today's autonomous mobile robots due to the explosion in sensor and actuator counts.

We are collaborating with NVIDIA on digital twin simulation and reference designs to accelerate AI training and shorten customer innovation timelines in robotics.

Q3 revenue of $2.88 billion came above the high end of our outlook, up 25% year-over-year, driven by strong industrial and communications growth.

Aerospace and defense backlog and supply limitations are a high-quality problem reflecting surging demand and capacity ramp challenges.

We expect Q4 operating margin to increase to 43.5% with gross margin returning to 70% after a one-time utilization disruption in Q3.

Notable Topics Discussed

  • ADI's industrial business has shown a consistent recovery, with growth accelerating across all subsectors including aerospace, defense, and healthcare.
  • Channel inventories remain lean, with end demand still below consumption by double digits, indicating ongoing inventory digestion.
  • Management expects Q4 industrial growth to be in the low to mid-teens quarter-over-quarter, despite typical seasonal declines.
  • The company has observed some catch-up in demand in Q4, supported by increased activity in aerospace, defense, and automation sectors.
  • Supply constraints in aerospace and defense are primarily due to capacity limitations and tooling delays, not demand shortages.
  • CapEx investments are being deployed to expand manufacturing capacity, especially in proprietary aerospace and defense products, to meet surging demand.
  • ADI is investing heavily in next-generation robotics, including humanoid and highly dexterous robots, with content potentially increasing tenfold over current AMRs.
  • The company is collaborating with NVIDIA on digital twin simulation programs and reference designs to accelerate development and AI training.
  • Demand for robotics solutions is driven by demographic pressures, security concerns, and supply chain security, supporting robust growth projections.
  • The company foresees doubling the automation business size by 2030, leveraging new sensing modalities, AI algorithms, and application-specific solutions.
  • Partnerships and ecosystem collaborations are central to ADI's strategy to deepen customer engagement and system integration.
  • The focus on high-precision sensing, control, and AI in robotics is expected to create exponential growth opportunities.
  • ADI's expertise in physics-based representations and sensing is crucial for autonomous robotic systems and real-time data processing.
  • The company is integrating multiple sensing modalities such as pressure, vibration, depth, acoustics, and vision to enhance robotic capabilities.
  • Investments in AI algorithms and robotics foundation models aim to shorten development cycles and improve system realism.
  • Collaborations with NVIDIA on simulation and training tools are designed to accelerate customer innovation in humanoid and dexterous robots.
  • The explosion in sensor and actuator counts in humanoid robots significantly increases system content and system value for ADI.
  • The company's focus on secure, connected, and software-driven solutions positions it well for future robotics market growth.
  • ADI continues to perform well in automotive, with record revenue levels driven by connectivity and power management solutions.
  • Q4 automotive revenue is expected to decline due to unwinding of pull-in activity and order normalization, especially in China.
  • Auto pull-ins in Q3 were primarily from China, whereas Q2 pull-ins were from North America and Europe, indicating regional differences.
  • Management is adopting a conservative stance on automotive near-term growth due to potential tariffs and EV credit expirations.
  • Despite short-term fluctuations, ADI expects to outpace industry growth with double-digit content gains.
  • The company remains confident in its long-term automotive market position, supported by share gains in next-gen ADAS and infotainment systems.
  • Demand in aerospace and defense has surged, creating high-quality supply constraints due to capacity limitations and tooling delays.
  • ADI is actively deploying new tools and expanding internal manufacturing capacity to meet the surging demand.
  • The aerospace and defense segment is supply-limited but remains a high-quality problem due to strong backlog and order flow.
  • The company has increased its internal fab footprint to support proprietary and complex product manufacturing.
  • Supply constraints are primarily driven by the need to build capacity faster than demand growth, which is a positive indicator.
  • The company views these constraints as a sign of high demand rather than a risk to revenue.
  • Q3 gross margin was 69.2%, slightly below the expected 70%, due to lower fab utilization caused by a one-time event in Europe.
  • Utilization rates are increasing and expected to return to more normal levels in Q4, supporting margin recovery.
  • A temporary disruption in fab utilization impacted gross margin, but the company expects to see margin expansion as utilization improves.
  • Industrial mix shift towards higher-margin products is expected to further support gross margin growth.
  • CapEx investments in internal fabs are designed to improve manufacturing resiliency and capacity utilization.
  • The company does not expect the previous utilization disruption to recur, and margins are projected to improve in Q4.
  • Management acknowledged ongoing geopolitical and macroeconomic uncertainties that could influence future demand.
  • Despite these challenges, ADI remains confident in its diversified business model and resilience.
  • The company is closely monitoring tariffs and trade policies that could impact supply chains and customer demand.
  • Long-term growth prospects remain positive, supported by diversified markets and applications.
  • The company emphasizes its flexible manufacturing strategy as a key to navigating global uncertainties.
  • Near-term outlook remains cautious but optimistic about sustained growth in industrial and robotics markets.
  • ADI has a strong, long-standing presence in China, with record auto results and ongoing design wins.
  • China's industrial markets are rebounding, but many sectors are still significantly below their prior peaks, offering long-term growth potential.
  • The company is confident in its ability to win and grow in China due to its performance premium and broad product portfolio.
  • Auto pull-ins in China contributed to Q3 revenue strength, but other industrial markets are still recovering.
  • Management sees a multi-year growth trajectory in China, supported by ongoing design wins and market share gains.
  • The company's scale and innovation premium position it well to capitalize on China's industrial rebound.
  • ADI generated $4.2 billion in operating cash flow over the past year and returned $3.5 billion to shareholders.
  • The company targets 100% free cash flow return over the long term, balancing dividends and share repurchases.
  • CapEx is expected to be within 4-6% of revenue, supporting capacity expansion and technological investments.
  • The company maintains a net leverage ratio of 1.1, indicating a conservative balance sheet.
  • Management emphasizes disciplined capital allocation to sustain growth and shareholder value.
  • Long-term financial strategy focuses on leveraging free cash flow to fund growth initiatives and shareholder returns.

Key Insights:

  • Adjusted EPS for Q4 is expected at $2.22, plus or minus $0.10.
  • Automotive revenue is expected to decline sequentially in Q4.
  • Company expects to return 100% of free cash flow to shareholders over the long term.
  • Industrial segment expected to grow in low to mid-teens quarter-over-quarter despite Q4 typically being seasonally down.
  • Long-term CapEx expected to remain within 4% to 6% of revenue.
  • Operating margin is expected to increase to 43.5%, plus or minus 100 basis points.
  • Q4 revenue guidance is $3 billion, plus or minus $100 million, with expected growth in industrial, communications, and consumer segments.
  • Tax rate guidance is between 11% and 13%.
  • Collaboration with NVIDIA on digital twin simulation programs and reference designs to accelerate AI training and development.
  • Focus on next-generation robotics including humanoid and highly dexterous robots with significantly higher content per unit.
  • Industrial business recovery continues with double-digit growth across all subsectors and regions.
  • Internal fabs footprint more than doubled to support industrial business resiliency and capacity expansion.
  • Investment in multi-sensing application-specific solutions integrating pressure, vibration, depth, acoustics, vision, and positioning.
  • Partnership with Teradyne Robotics to enhance precision positioning and dynamic motion control for logistics industry cobots and AMRs.
  • Strong growth in aerospace and defense, automatic test equipment, and health care sectors.
  • Supply constraints noted in aerospace and defense due to surging demand and tooling lead times.
  • CEO Vincent Roche emphasized ADI's innovation-driven, resilient, and diversified business model as key to navigating geopolitical and macro uncertainties.
  • Focus on maintaining lean channel inventories while supporting cycle recovery with higher balance sheet inventory.
  • Industrial automation business expected to double by 2030 driven by demographic, economic, and security factors.
  • Management highlighted the importance of ecosystem partnerships and customer collaboration to capture system value and ASP expansion.
  • Management views aerospace and defense backlog and supply limitations as a high-quality problem reflecting strong demand.
  • Robotics market growth driven by AI-enabled technology and Intelligent Edge data leveraging ADI’s precision sensing and power management.
  • Strong confidence expressed in China market growth, especially in automotive and industrial sectors despite competitive challenges.
  • Variable compensation normalization expected to moderate OpEx growth in fiscal 2026 after elevated levels in fiscal 2025.
  • Automation business expected to grow faster than prior 15% target, potentially doubling by 2030 due to new robotics modalities.
  • Automotive revenue pull-ins occurred in China in Q3; Q4 expected to see unwind of this pull-in leading to sequential decline.
  • Gross margin impacted in Q3 by one-time utilization disruption in European fab; expected to return to 70% in Q4.
  • Industrial segment showing strong sequential growth with no significant channel inventory build; end demand still below consumption.
  • No evidence of pull-forward demand in industrial segment; bookings trends align with expected cyclical recovery.
  • Supply constraints in aerospace and defense due to tooling and capacity ramp; other industrial sectors have stable supply.
  • Automotive market expected to record third consecutive record year driven by content and share gains despite near-term softness.
  • CapEx investments focused on internal fabs to support industrial business growth and supply chain resiliency.
  • Channel inventory weeks declined slightly in Q3, indicating tighter inventory management and stronger end demand.
  • China remains a highly competitive market where ADI commands a performance premium and scale advantage.
  • Company’s hybrid manufacturing strategy provides optionality and resilience amid global operating environment challenges.
  • Geopolitical and macroeconomic uncertainties, including tariffs, remain a risk and are being closely monitored.
  • Industrial end markets outside automotive in China remain significantly below prior peaks, indicating runway for growth.
  • Variable compensation linked to revenue and profitability growth caused higher OpEx growth in fiscal 2025.
  • Consumer segment growth driven by handsets, gaming, hearables, and wearables continues to be strong and consistent.
  • Digital twin and AI training collaborations with NVIDIA aim to shorten customer innovation timelines in robotics applications.
  • Industrial automation growth driven by economic, demographic, and security pressures pushing manufacturing closer to consumption points.
  • Management emphasizes the importance of precision sensing and power management as core differentiators in emerging markets.
  • Robotics content in humanoid robots expected to be 10x that of current autonomous mobile robots due to sensor and actuator counts.
  • Strong backlog and supply limitations in aerospace and defense reflect robust demand and capacity ramp challenges.
Complete Transcript:
ADI:2025 - Q3
Operator:
Good morning, and welcome to the Analog Devices Third Quarter Fiscal Year 2025 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. Rich Puccio, Executive Vice President and Chief Financial Officer. Sir, the floor is yours. Richard
Richard C. Puccio:
Thank you, Josh, and good morning, everybody. Thanks for joining our third quarter fiscal '25 conference call. Joining me today on the call is ADI's CEO and Chair, Vincent Roche. For anyone who missed the release, you can find it and related financial schedules at investor.analog.com. 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 and our 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, nonoperating expenses, operating margin, tax rate, EPS 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 EPS are on a fully diluted basis. Okay. With that, I'll turn it over to ADI's CEO and Chair, Vincent Roche.
Vincent T. Roche:
Thank you, Rich, and a very good morning to you all. Well, our third quarter revenue and earnings exceeded our expectations. And for the second quarter in a row, we achieved double-digit year-over-year growth across all of our end markets. While geopolitical and macro uncertainty continues to cloud the outlook, we believe ADI's innovation-driven, resilient, highly diversified business model positions us to continue to successfully navigate these challenges. The accelerated recovery of our industrial business, encompassing instrumentation, automation, health care, aerospace and defense and energy management is a case in point. As you've heard us detail on prior calls, our industrial recovery began in the aerospace and defense and instrumentation sectors, driven by our strong product and customer portfolio positions as well as spending growth in defense and AI infrastructure. We're now seeing double-digit year-over-year growth across the entire industrial portfolio. For today's call, I'm going to focus on our $1 billion-plus industrial automation business, which was the last sector to return to double-digit growth. Its market dynamics and trajectory are expected to bring long-term expansion. Companies have long invested in automation systems to gain first-order productivity, efficiency and quality benefits. Today, a new wave of adoption is being driven by economic and demographic pressures and enabled by the potential to transform and accelerate business through leverage of real-time Intelligent Edge data. ADI's high-performance technology stack and deep domain expertise are crucial to customer success in this highly sense, securely connected software-driven era and the new robotic modalities that are emerging. It's predicted that the convergence of compounding macro and AI-enabled technology factors will drive robust double-digit growth within robotics market for the foreseeable future. ADI's ability to deliver exceptionally accurate physic representations and enable faster insights of the edge we become even more essential as the market migrates to next-generation autonomous robotic systems. Our long history of robotics has given us a deep understanding of the sectors hardest problems and degraded opportunities. We're investing to maintain our performance edge and analog while capturing increasing levels of system value. In addition, we're building ecosystem partnerships and deploying experts and an increasingly broad suite of technologies to enrich and deepen our customer collaborations. We expect this multi-pronged approach to unlock significant ASP and some expansion for our automation business. Following the proven path we've successfully executed in other markets such as aerospace and defense and health care. Now let me share a few examples of our strategy in action. Earlier this year, we partnered with Teradyne Robotics. Our solutions for precision positioning and dynamic motion control are helping Teradyne increase their value proposition to the logistics industry through higher- performance cobots and autonomous mobile robots or AMRs. In the agricultural sector, where labor shortages are [indiscernible] high-precision robotic systems are increasingly filling the gap. In addition, these systems enhanced collection capabilities are enabling higher crop yield while reducing water and chemical usage levels. A growing portion of our robotics revenue is coming from this sector as we help customers solve their toughest challenges through our sensing, connectivity and energy management solutions. In the health care sector, robot-assisted surgery systems minimize invasiveness and improve patient outcomes through enhanced system precision. And we're leveraging our leading precision technology franchise to successfully attach more of our power management, connectivity and sensing content to the more innovative systems being designed, employed. This year, we're achieving robust growth and expect continued momentum as the proliferation of automated surgical procedures further expands our opportunities in this space. Overall, the near and medium-term outlook for robotics is compelling, supported by increasing revenue and the burgeoning opportunity pipeline. From this strong foundation, we're extending into the next promising era of robotics, namely humanoid and other highly dexterous robot form factors, and creating a potentially exponential growth opportunity for ADI. Our content in the humanoid robot is likely to be several thousands of dollars, but that's basically a 10x increase over the content in today's cutting-edge AMRs. The primary reason for this content multiplier is the explosion sensor and actuator counts. Every joint and point of contact requires accurate sensing and precision motor control and every sensor and actuator drives the signal chain and power management opportunity for ADI. To further capture this flourishing opportunity, we're investing in higher-level application-specific solutions that integrates multiple sensing modalities, such as pressure, vibration, depth, acoustics, vision and positioning with high accuracy, ultra-low power signal chains, functionally safe power management and AI algorithms powered by robotics foundation models. Simultaneously, we're collaborating with NVIDIA on a range of digital twin simulation programs and reference designs for humanoid and other robotic systems to accelerate development and AI training for our customers. This work is particularly relevant for high- value applications such as dexterous manipulation of cable assemblies in data centers and of course, in automotive manufacturing to name just one. We are combining ADI's unique sensor expertise and our latest advances in robotics policy training techniques to enhance realism in NVIDIA's Isaac Sim and substantially shorten our customers' innovation time lines. So in summary, we're capitalizing on growth in advanced robotics today and investing to capture even more value in the future. Ultimately, the strategy of investments and customer impact of our robotics business is a microcosm of our approach across ADI mainly on covering and tackling the hardest innovation challenges at the intelligent physical edge and leveraging our industry-leading technology portfolio and expertise to solve them. As we turn our attention to the end of fiscal '25 and the beginning of the new fiscal year, we're focused on executing our strategy and capitalizing on cyclical and idiosyncratic momentum. Despite the geopolitical and macro turbulence, we remain undeterred and excited by the tremendous growth opportunities that we see over both the near and long terms. And with that, I'm going to pass it on to Rich.
Richard C. Puccio:
Thank you, Vince. Now on to our third quarter results. Revenue of $2.88 billion came in above the high end of our outlook, up 9% sequentially and 25% year-over-year. Industrial represented 45% of our third quarter revenue, finishing up 12% sequentially and 23% year-over-year. Our industrial recovery has continued with sequential growth across all subsectors and regions, year-over-year growth accelerated across all major applications led by our automatic test equipment business, fueled by increasing AI investment. Additionally, our aerospace and defense business had a record quarter. Automotive represented 30% of quarterly revenue, finishing down 1% sequentially and up 22% year-over-year. Double-digit year-over-year growth continues to be driven by our leading connectivity and functionally safe power solutions. Communications represented 13% of quarterly revenue, finishing up 18% sequentially and 40% year-over-year. Our wireline and data center business, which is roughly 2/3 of total communications, grew double digits sequentially and year-over-year as increasing AI demand continues. Wireless also grew double digits both sequentially and year-over-year. And lastly, consumer represented 13% of quarterly revenue, finishing up 16% sequentially and 21% year-over-year, marking the fourth straight quarter of double-digit year-over-year growth. We continue to see strength across handsets, gaming, hearables and wearables. Now on to the rest of the P&L. Third quarter gross margin was 69.2% and operating margin was 42.2%, up 100 basis points sequentially and year-over-year. Nonoperating expenses finished at $57 million, and the tax rate for the quarter was 11.9%. All told, EPS was $2.05, above the high end of our guided range and up 30% year-over-year. Now I'd like to highlight a few items from our balance sheet and our cash flow statement. Cash and short-term investments finished the quarter at $3.5 billion. Our net leverage ratio remained virtually flat at 1.1. Inventory increased $72 million sequentially in support of the cycle recovery. Days of inventory declined to 160 and channel weeks ticked lower. We are continuing to execute our strategy of keeping leaner channel inventories while maintaining higher levels on our balance sheet. Over the trailing 12 months, operating cash flow and CapEx were $4.2 billion and $0.5 billion, respectively. We continue to expect fiscal 2025 CapEx to be within our long-term model of 4% to 6% of revenue. Free cash flow over the trailing 12 months was $3.7 billion or 35% of revenue and we have returned $3.5 billion in cash to shareholders over the last 4 quarters. 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. Now on to our fourth quarter guidance. Revenue is expected to be $3 billion, plus or minus $100 million. On a sequential basis, at the midpoint, we expect industrial, communications and consumer to increase with the fastest growth in industrial. Automotive is expected to decline. Operating margin is expected to increase to 43.5%, 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 $2.22, plus or minus $0.10. In closing, our strong results and outlook for continued growth, especially in the industrial market, reinforce our view that 2025 will close as a strong recovery year for ADI. However, we are mindful of the continued uncertainty facing customers with respect to tariffs and are monitoring the impacts closely. We believe we are well positioned to successfully navigate an evolving global operating environment, thanks to the optionality enabled by the diversity of our markets, applications and products and the resilience of our hybrid manufacturing strategy. With that, let's go to our Q&A session. We ask that you limit yourself to 1 question in order to allow us for additional participants on the call this morning. If you have follow-up questions, please requeue and we will take your questions if time allows. Operator, can we have our first question, please?
Operator:
[Operator Instructions] Our first question comes from Timothy Arcuri with UBS.
Timothy Michael Arcuri:
So industrial last quarter was up 7%. It was up 11% this quarter, and it sounds like it's going to be very strong again in fiscal Q4. Can you just talk -- do you think you're now shipping above consumption in these markets? How do you view sort of where we are? Are we now in inventory build load in those markets? And how do you sort of assess how long this can last?
Richard C. Puccio:
So -- since we called the bottom back in Q2, so industrial has been our most profitable business and has grown sequentially every quarter. More recently, as we talked about, the growth has accelerated. And our outlook for Q4, which is normally a seasonally down quarter for industrial, we expect it to grow in the low to mid-teens quarter-over-quarter. So very strong outlook there. And what's important is growth is happening across all of our industrial sectors, including instrumentation, automation, aerospace, defense, health care and energy infrastructure as well as across all the geographies. Again, an indication that we are in the cyclical upturn. At the same time, for [ route ] we've talked about this in multiple quarters. Our channel inventories continue to be very lean, and we believe end demand is still double digits below consumption. Now we are going to start seeing some catch-up to the end demand in the fourth quarter. As I mentioned in my prepared remarks, we did see the channel inventory weeks ticked down a little bit as the end demand was a bit higher than we had planned. So on top of that, as we look forward, we are continuing to see green shoots across aerospace and defense and ATE. And so we feel pretty good about where we are both near and long term from an industrial perspective.
Operator:
Our next question comes from Harlan Sur with JPMorgan.
Harlan L. Sur:
Great job on the quarterly execution. What you guys had anticipated last earnings call, gross margins for Q3 to be closer to 70%, but actually, actuals were actually closer to 69%. I assume it's because of the upside and the lower-margin communications business, which was up 17% sequentially. So potentially mix related. Is that a fair assumption? And then on Q4 at the midpoint of your guidance range, are you guys assuming that gross margins are improving sequentially?
Richard C. Puccio:
Yes. So I'll take that one. So yes, we did have an implied increase in the margin. However, we did have an unexpected lower utilization during the quarter, which kept us from growing our gross margin on a sequential basis. However, the utilization is back on track, and we expect it to resume its increase. And in Q4 at the midpoint, we do expect to get back to a 70% margin. Had we not had the disruption in the utilization in the third quarter, we actually would have grown sequentially, but the mix piece as you mentioned, because we still are only at 45% industrial mix in the third quarter would have kept us from fully getting to 70%.
Operator:
Our next question comes from Tore Svanberg with Stifel.
Tore Egil Svanberg:
Congrats on the continuous recovery here. Vince, I had a question on the automation revenue. I think in the past, you've talked about this sort of being a 15% grower, and that's certainly above the corporate average. I'm just curious, given everything that you're seeing now in humanoids, in robotics, reference designs with some key GPU plays and so on and so forth. Are you starting to see perhaps an acceleration to that 15% growth target going forward?
Vincent T. Roche:
Yes. Thanks for the question, Tore. So yes, the automation business for ADI is multiple hundreds of millions of dollars on an annual basis. And it's our sense that by 2030, we can double the size of that business given the strength of the R&D pipeline, the opportunity pipeline that we have as well as some of these new modalities that are coming into play as demographic and macro pressures kind of lean on putting more and more manufacturing capability closer to points of consumption. There's obviously a security issue as well as supply chain security issues. So all those factors, I think exogenous and endogenous factors point to a strong growth in that business. Also, as I pointed out in the prepared remarks, we're seeing a lot of these sensing modalities come to bear. And every one of those sensors or actuators that our customers are putting in place require very precision -- very, very precise sensing, control and data processing. So for all those reasons, we feel very optimistic about the state of this business and the potential to grow and double it by over the next 5 or 6 years.
Operator:
Our next question comes from Vivek Arya with Bank of America.
Vivek Arya:
I think in response to your prior question, you mentioned that you're seeing green shoots in different parts of industrial, right? And despite the strength that you saw in Q2 and Q3 -- does it mean that as we kind of potentially look out to Q1, is ADI still capable of growing at least seasonal or above seasonal? And if yes, what is kind of normal range of seasonality so we can calibrate our models?
Richard C. Puccio:
Vivek, I'll start. From a Q1 perspective, as we've said before, we don't guide to Q1, but we do expect that we'll be able to grow that seasonal. And obviously, for us, on an overall perspective, first quarter tends to seasonally be down in the low single digits.
Vincent T. Roche:
Yes. So I think as we look into the new year, I believe industrial will be a very, very strong part of our momentum in the coming year. And as Rich narrated in part of Q&A here, from just the supply-demand side of things, we're seeing still customers are in digestion phase, their excess inventories, and particularly in the broad market, which is a piece of -- a significant piece -- has been a significant piece of the industrial business in the past where we're still seeing the demand there quite light. So there's still kind of a normalization to take place, which should boost the industrial sales in the coming quarters as well as our position with new products and our position with customers and new applications, so in the automation space. So we've got aerospace and defense, which has been incredibly strong. In fact, in some ways, we're supply limited in that business. So I think that will be the bedrock of the next several quarters of the company's performance.
Operator:
Our next question comes from Jim Schneider with Goldman Sachs.
James Edward Schneider:
I was wondering if you could provide a little bit more color on what you're seeing in the automotive market. I believe last quarter, you referenced some pull in activity. Did you, in fact, see that occur in the quarter? And from -- if so, from what regions? And then going forward, maybe talk a little bit about what's driving sequential decline you expect in the next quarter? And any color you can provide on regions or customer OEM types would be helpful.
Richard C. Puccio:
Thanks, Jim. So obviously, we continue to perform very well in automotive, particularly in our connectivity and power management doing auto revenue. As we said, we expect to record record levels of auto revenue for '25. In addition to our content broken share gains in the next-gen ADAS and infotainment systems, we do believe our auto revenue has been aided by some order acceleration, which we talked about in Q2, we do think there was some additional acceleration in Q3. However, we do see an unwinding in Q4, which is why we expect to see Q4 come down. We think that, that will be the sort of close out of that line. And this is what we actually talked about when we released our last quarter results was -- we expected that the pull-ins were likely going to come from our Q4 or Q1 period based on the way it's settling out, it looks like it's unwind in the fourth quarter. And if you think about that somewhat just from a sizing perspective, in the current quarter, we were obviously above our high end of our guide. And I think largely that part of the -- that we were above the high end of our guide was likely related to auto pull-ins. And what's different this time actually is the auto pull-ins we saw at this time in Q3 were in China, whereas when we talk about them in Q2, that was for North America and Europe. It's impossible for us to know how this will shake out. But we do think that given the behavior we've seen from our auto customers, EV credits expiring and a risk of tariffs sort of could curtail production. We are taking a bit of a more conservative view to automotive in the near term. But stepping back again, you'll have our third record year in Ottawa in the last 4 years, which is reflecting our content and share gains. And we've talked about this before, we tend to outpace the SAAR volumes with content gains where we're getting about a double-digit benefit from share and content. So we feel really well positioned there as we go into the medium and long term.
Operator:
Our next question comes from Stacy Rasgon with Bernstein Research.
Stacy Aaron Rasgon:
So on the auto points, and I guess relative to industrial. So I mean, you're guiding auto-implicity down 15% sequentially as those pull- ins kind of ease. But industrial, you're guiding up, I don't know, you said low to mid-teens, which would put it up in the mid-30% year-over-year. What are you seeing differently on the trend in industrial versus what you saw in auto that gives you confidence that the strength you're seeing industrial has not also pull forward.
Richard C. Puccio:
So what we talked about last time as the indicators, Stacy, for what we thought were pulling where we saw unplanned growth in areas around -- and we saw the anomalous bookings behavior that happened around the tariff announcements and [indiscernible] reversals, things normalize. We have not seen that kind of behavior in industrial. In fact, the bookings trends have followed the trends we were expecting. It's impossible to say there isn't some minor amount maybe in any of the businesses, but we haven't seen anything outside of auto that would give us an indication as any meaningful pull-in in our business.
Stacy Aaron Rasgon:
Industrial is well above seasonal, though. So I mean, is that just -- that's just increased demand, is channel fill or what?
Vincent T. Roche:
It's nothing to do with channel. Channel is very lean. We're still under shipping real consumption of the market. Parts of industrial have been just an inventory digestion mode for actually a couple of years. So we're starting to get that behind us. But if you look at the strength of our aerospace and defense business I mentioned there a little while ago, we're actually supply line there, very, very strong backlog. ATE, which is supporting the build-out of AI chips and infrastructure very, very strong, strong demand. And we've begun to see the recovery of the automation business in the -- over the last couple of 2, 3 quarters. When you couple that a while with health care, which has been really dump in terms of demand, ever since the kind of the peak of the pandemic there, that should come good as well in that we're seeing signs of stabilization, but that should come good over the next few quarters. So I think you pull that together the breadth and the depth, the customer count, the product counts, some of the idiosyncratic trends that we've captured as well as just the overall rising tide in demand across the board bodes well for the industrial business.
Operator:
Our next question comes from Chris Danely with Citi.
Christopher Brett Danely:
Can you just give us a little more color on why the utilization rates came down -- and then where utilization rates are, where you expect them to go and any other gross margin drivers going forward as well?
Vincent T. Roche:
I think we had, as Rich said, a onetime event in our European fab during the last quarter. That was the primary dampening effect on the gross margin. So it became an absorption issue. I wouldn't say as well, pricing has been very, very steady. And as our mix improves on the industrial side of things, we get the benefit of that in the gross margin. And I don't expect a repeat of what was a onetime event in one of our factories in the last quarter to repeat.
Christopher Brett Danely:
What are utilization rates now? .
Richard C. Puccio:
So I know you always like to ask me this question. They're increasing, where we're not yet back to utilization levels we were obviously in the pandemic era nor do we expect to get all the way there. But we are continuing to increase, as I mentioned, other than this onetime hiccup, which is now behind us. We are back increasing as given the growth we're seeing and the planned starts in the factories, we're getting higher utilizations.
Vincent T. Roche:
I think as well we have talked many, many times about the CapEx that we've deployed to strengthen the resiliency of the internal fabs at ADI. So we have built -- we've more than doubled the footprint of the internal fabs that support largely the industrial business. So we're absorbing that cost. And as the industrial business continues to increase strength, that absorption strengthens as well. So I think you've got to bear those things in mind.
Operator:
Our next question comes from Joe Moore with Morgan Stanley.
Joseph Lawrence Moore:
A couple of minutes ago, you talked about seeing some supply limitations in aerospace and defense. And I wanted to just follow up on that and talk -- ask where those supply constraints might be coming from? And are you seeing any supply constraints in any other part of your industrial business as things get stronger? .
Vincent T. Roche:
No, I think -- we've just seen a tremendous upsurge in the man. It just takes time to lay in the capacity, the tooling in the aerospace and defense area. And it's a highly diversified business with an incredible array of product complexities. So it's really just the case of each quarter, we're laying in more capacity -- but the demand keeps interesting. It's a very, very high-quality problem that we have. Demand is surging ahead of our ability to manufacture right now, but we've been laying into CapEx, the tools to make sure that we capture the opportunity. And pretty much everything we do there is sole sourced. I mean, these are proprietary products. And we see this -- we've increased our footprint with an internal factory that's very, very important to the manufacturing of our aerospace and defense solutions. So we've been tooling that facility as well. So I think generally speaking, we're in better and better positioned. But really the problem, it's a high-quality problem of surging demand.
Richard C. Puccio:
Yes. So I'll put a finer point on it for you, Joe. We're actually deploying tools into the aerospace and defense manufacturing in the third and fourth -- some in the third quarter and more in the fourth quarter to alleviate some of the stresses just described. And from an overall business perspective, we certainly have supply right now to cover all of the near-term demand that we have on the books.
Vincent T. Roche:
I think the rest of the industrial business is in good shape overall regarding supply.
Operator:
Our next question comes from Joshua Buchalter with TD Cowen.
Joshua Louis Buchalter:
Congrats on the good results. I apologize for being nitty-picky in an objectively good quarter. I did want to ask about gross margins, though. I think a couple of quarters ago, you had mentioned $2.7 billion being sort of the level at which you hit 70% gross margin. It looks like that's seemingly around $3 billion. I guess -- can you maybe walk through what's changed and how we should think about follow through from here going forward?
Richard C. Puccio:
Thanks, Josh. And we have talked about this a lot, and I think that the part 2 of what we've said all along is getting to $2.7 billion and getting back to a 70% margin would require us to get back to a more normal industrial mix. So near term, as you saw, we're only 45% industrial when we were building all those models, we were a much larger percentage. So we have said we would need to have that mix. And obviously, the mix is shifting as the industrial grows. And if you look to our -- where we expect our Q4 to go with the industrial growth we've talked about, we will probably exit Q4 with a more like a 49% industrial mix, which is part of the reason we think we'll get back into that 70% range in our fourth quarter. So it is -- as we talked at the beginning a little bit, it is also mix constrained given the industrial piece is our most profitable business.
Operator:
Our next question comes from Ross Seymore with Deutsche Bank.
Ross Clark Seymore:
Just wanted to pivot over to the OpEx side of things. Any sort of color for your fiscal fourth quarter? And probably more importantly, as we look into fiscal '26, I know you guys have a big variable components to your OpEx. This year, it looks like it's up, I don't know, high teens and something like that in fiscal '25. Any sort of color on how the FX would relate to revenues in fiscal '26.
Richard C. Puccio:
So yes. So from a fiscal '25 perspective, assuming the midpoint for Q4, we expect we'll deliver about 100 basis points of operating leverage versus '24, which I feel very good about because when we started the year, knowing we were going to have a pretty significant headwind on the variable comp. We thought we might have a pretty flat operating leverage year, but we are going to deliver some additional leverage. Now a lot of that is coming from the gross margin expansion, as we've talked about because of variable, our OpEx is growing at a higher rate than we would normally expect, and that is as we've talked about, right, in the prior year, given our bonus pays on revenue growth and profitability and the fact that '24 had no revenue growth and margins were muted, bonus was very low, which was part of the reason we were able to hold our 40% operating margin in the trough year. Now with a return to significant growth, our variable comp is normalizing to a much higher level from a very low payout in the prior year. So if you look forward to '26, I would expect that acceleration piece that we saw from the variable comp to decline. We obviously expect to have variable comp in a growth here. But given the new baseline of '26, we would expect in the revenue growth that we would get some continued leverage as the operating -- as the variable won't increase as radically as it did '24 to '25. And excuse me -- obviously, all of these points of view are contingent on revenue growing, which we're assuming from a top line perspective.
Operator:
And our final question comes from Chris Caso with Wolfe Research.
Christopher Caso:
Just a question on business in China right now. And you mentioned in some of your earlier comments that China auto was strong last quarter. Could you give us some sense of what the totality of the China business look like? And again, in that case, even outside of auto, is there any fear of any pull forwards within that business or any anomalies that you may have seen within the China business in the last quarter?
Stacy Aaron Rasgon:
Sure. So obviously, we've talked about China is a very competitive place for us. I continue to be very confident in our ability to win and to grow in China, which we've done for decades. Now if you think about how we're positioned in the market, right, we tend to get a premium for our performance, and that's the innovation premium you've all heard me talk about, where performance matters. They're going to continue to pick us, right, which is why we tend to get higher ASPs. It also makes it very challenging for those that make products that are good enough to compete with us in that market. So we feel from a competitive perspective, we feel very well. Obviously, the other thing for us is significant is scale is really important, especially in Analog with the broad base of components. We've got 6 decades of experience building that with 70,000 SKUs. It's really -- especially through an industrial given the diverse nature of that product. As we've talked about now are a number of quarters, China has been leading our recovery, right? We've talked about achieving record auto results this year. We had record design wins in '24. We've continued growth in design wins in '25, and our outlook for China is pretty positive over the next 3 to 5 years based on the things we're seeing here. Now it is interesting. We spent a lot of time talking about how strong China auto is -- we've started to see year-over-year growth in China across all of the industrial end markets. But outside of auto, all of those other end markets are well off their prior peaks. So north of 35% at least and some of them are still 50% off their peaks. So we think there's still runway there for us from a medium and long-term perspective as that market continues to rebound.
Operator:
I would now like to turn the call back over to Mr. Rich Puccio, for any closing remarks.
Richard C. Puccio:
All right. Thanks, everyone, for joining us this morning. And with that, a copy of this transcript will be available on our website and all available reconciliations and additional information can also be found at the Quarterly Results section of our Investor Relations site at investor.analog.com. Thanks again for joining us and your continued interest in Analog Devices.
Operator:
Thank you. This concludes today's Analog Devices conference call. You may now disconnect.

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