Semiconductor company Analog Devices (NASDAQ: ADI) published its latest quarterly earnings report Thursday morning, but despite its estimates-beating performance, investors sold out of the stock.

They left it with a more than 4% drop in share price on the day, on concerns that a lingering tariff war could badly affect its fundamentals. That decline compared unfavorably to the S&P 500's (SNPINDEX: ^GSPC) marginal slide.

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Powerful double-digit growth

For its fiscal second quarter of 2025, Analog Devices' revenue came in at $2.64 billion, 22% higher year over year. Headline net income grew far more robustly, increasing by almost 89% to just under $570 million. On a non-GAAP (generally accepted accounting principles) adjusted, per-share basis, the company netted a profit of $1.85, up from the $1.40 it booked in the same period of fiscal 2024.

Image source: Getty Images.

Analysts were expecting lower numbers. Their consensus projection for revenue was $2.51 billion, and that for adjusted profitability was $1.70 per share.

In its earnings release, Analog Devices attributed the double-digit gains to both internal and external factors. It quoted CEO Vincent Roche as saying, "Against a backdrop of global trade volatility, our performance reflects the ongoing cyclical recovery, and the strength and resiliency of our business model."

Tariff-related demand

During the quarter, Analog Devices took in nearly $850 million for its products used in current-generation automobile systems.

This critical part of its business grew by 24% year over year; however, the company said this was due in part to heightened demand in anticipation of the Trump administration's tariffs. The company's personal electronics business was also affected similarly. That's concerning, as it's very likely such demand isn't sustainable, no matter how the tariff war plays out.

Nevertheless, Analog Devices is still anticipating growth. It proffered guidance for its current (third) fiscal quarter, stating that revenue should be $2.65 billion to $2.85 billion, and adjusted net income $1.82 to $2.02 per share. On average, analysts are estimating $2.62 billion on the top line, and $1.82 per share for adjusted profitability.

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Analog Devices, Inc. (NASDAQ:ADI) reported Q2 FY2025 earnings on May 22, 2025, with revenue of $2.64 billion—up 22% year-over-year and 9% sequentially—and non-GAAP EPS of $1.85, surpassing the high end of guidance.

The company demonstrated significant sequential growth across industrial, automotive, and communications end markets, while announcing guidance for Q3 FY2025 revenue of $2.75 billion (+/- $100 million) and maintaining an expectation of advancing toward long-term margin and free cash flow targets. The discussion below covers decisive supply chain adaptations, cyclical industrial recovery dynamics, and long-term operating leverage incentives, all with quantitative and strategic detail.

Resilient Supply Chain Transformation Enhances Geographic Flexibility

Capital expenditures in recent years have increased internal and external manufacturing capacity, with footprint now exceeding twice pre-pandemic levels, supporting the majority of products made on mature (≥180nm) process nodes. Cross-qualification of broad product lines and partnership expansion with foundries, including adoption of 300mm fine-pitch technology, has enabled production shifts across the U.S. Europe, and global locations. This approach addresses customer risk related to dynamic macroeconomic and geopolitical volatility.

"We've cross-qualified a significant portion of our broad product portfolio to be able to quickly swing production across geographies. In short, our customers now enjoy greater supply optionality and resilience than ever before."
-- Vincent Roche, CEO and Chair

This agile hybrid manufacturing model reduces supply risk exposure.

Cyclical Industrial Upswing Supported by Lean Inventory Strategy

Industrial accounted for 44% of revenue, with growth of 8% sequentially and 17% year-over-year, driven by broad-based sub-sector and regional recovery; positive book-to-bill ratios (>1) were observed across all industrial subsegments. The company has been under-shipping to this segment—delivering over 10% below actual end-market consumption—which has created pent-up demand as customer inventories remain constrained.

"From a consumption perspective, we're probably still shipping 10% plus below end consumption But if you think about the outlook, you know, if you take our guide, embedded in that guide is about 10% growth in industrial. And at that midpoint, we will be shipping to end demand."
-- Richard Puccio, Chief Financial Officer

This will provide operating leverage.

Operating Leverage Poised to Accelerate as Comp-Driven OpEx Peaks

Operating margin (non-GAAP) reached 41.2%, with gross margin (non-GAAP) climbed to 69.4% (+60bps sequentially); OpEx increased by $57 million sequentially, exclusively due to variable compensation tied to accelerated earnings growth after a flat FY2024 (non-GAAP).

Management emphasized that ongoing investments are concentrated in R&D, especially in analog, power management, digital, and software capabilities, aligning OpEx with innovation priorities rather than fixed overhead expansion.

"So while we are optimistic, we will continue to achieve operating margin percent growth, the increase in the variable in 2025 is muting that. However, when we look to 2026, we'll be going off of a smaller base, and so we do more leverage if we continue the cyclical upturn."
-- Richard Puccio, Chief Financial Officer

This will support greater returns to shareholders and incremental strategic flexibility.

Looking Ahead

Management projects revenue of $2.75 billion (+/- $100 million) for Q3 FY2025, with sequential growth led by industrial, and an anticipated decline in automotive after tariff-induced pull-ins; operating margin (non-GAAP) is forecast at 41.5% (+/- 100bps), adjusted EPS at $1.92 (+/- $0.10), and CapEx is expected to fall within the long-term range of 4%-6% of revenue for FY2025.

Management reaffirms confidence that FY2024 marked the trough in revenue, citing lean channel inventories, increasing backlog, and momentum across all geographies. No explicit guidance was provided for FY2026.

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This article was created using Large Language Models (LLMs) based on The Motley Fool's insights and investing approach. It has been reviewed by our AI quality control systems. Since LLMs cannot (currently) own stocks, it has no positions in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.