The Zhitong Finance App learned that global analog chip giant ADI.US (ADI.US) used a financial report that completely crushed expectations, confirming that the logic of expanding artificial intelligence (AI) computing power is being transmitted to the wider industrial chain. Financial reports show that in the third quarter of the 2026 fiscal year ending August 1,
Adderall achieved revenue of US$4,022 billion, an increase of 40% over the previous year, which not only far exceeded analysts' expectations of US$3.91 billion, but also marked the first time in the company's history that it broke through the US$4 billion mark in a single quarter. GAAP net profit jumped from $519 million in the same period last year to $1.34 billion, a year-on-year increase of 158%. Gross margin expanded simultaneously with operating margin — GAAP gross margin reached 67.3%, operating margin 40.1%; adjusted gross profit margin 72.5%, adjusted operating margin 50.0%. Adjusted earnings per share were $3.45, better than analysts' expectations of $3.34.
Looking at the terminal market, Adderall's performance growth showed a pattern of multiple blossoms. The industrial business — covering the fields of automation, aerospace and defense, test equipment, etc. — is still the company's “basic market”, contributing nearly half of its revenue. The communications business grew the most, with revenue up 84% year over year — management has previously indicated that data centers already account for the majority of the communications business and contribute products related to power management and optical modules. The automotive business is recovering and growing, and consumer electronics are still a relative drag.
Adderall's position in the AI industry chain is an analog and power supply chip that “allows the rack to eat power, measure accurately, and connect”. As the power density of AI servers continues to rise, the power management link from the power grid to the chip is becoming a key bottleneck in the expansion of computing power — and Adeno is the core supplier in this area.
At the same time, Adeno also gave fourth quarter guidance that exceeded market expectations. The company's median revenue forecast for the fourth quarter was $4.3 billion, higher than analysts' expectations of $4.08 billion; adjusted median earnings per share was $3.86, which was also higher than analysts' expectations of $3.54.
Adeno's management's statement during the earnings conference call stated that AI is driving Adeno into a new growth cycle “from the grid to the chip.” AI infrastructure requires more than just more chips, but a complete upgrade of the entire system, from electricity production and delivery to eventually being consumed by processors. This will greatly increase the demand for analog chips and high-value power solutions, which means that the company's growth prospects are impressive. At the financial level, the company maintained strong cash flow and high shareholder returns while maintaining high growth, showing an efficient and sustainable financial model.
Here are the details of Adderall's third-quarter earnings call.
I. Adeno management's statement
Vincent Roche — CEO and Chairman of the Board of Directors of Adeno
As you can already see, our third-quarter revenue, profit margin, and profit surpassed previous forecasts, and all terminal markets grew. Among them, the data center and industrial markets led the way, driving the company to achieve the first quarter in history where revenue exceeded 4 billion US dollars in a single quarter. Demand for our solutions continues to grow, supported by strong AI and defense spending, cyclical momentum, and potential long-term content growth in diverse end markets.
Through targeted research and development, we continue to push the limits of technical performance and accelerate the speed of providing more comprehensive solutions to our customers' most difficult problems. At the same time, our investment in hybrid manufacturing networks has enabled us to increase the flexibility and responsiveness of our supply chain, and continue to achieve more than seasonal growth for more than two consecutive years.
In my next talk today, I'll focus on how we're helping our customers address the unprecedented and still accelerating AI infrastructure and energy system needs.
Today, data center capacity is no longer measured in FLOPS and TOPS, but in gigawatts (GW). This fact highlights one of the most decisive challenges in the AI era: power supply capacity has become the primary bottleneck for the further development of AI.
Addressing this challenge is more than just adding more energy; it requires a grid-to-chip (grid-to-chip) system-level approach that not only improves energy availability and transmission capacity, but also extracts maximum computational power from every watt of electricity already delivered.
Now let me take you through some of the key components of our “grid-to-chip” strategy, starting with the grid side where AI bottlenecks began to emerge.
As power networks become more complex, visibility, efficiency, and resilience are becoming key challenges. Customers are using Adderall's grid monitoring solutions to clearly understand the energy flow throughout the network and obtain voltage, current, power quality, and system health in real time. Our high-value solutions are helping utilities, energy operators, and infrastructure providers improve efficiency, reliability, and utilization.
One of the increasingly important components of the power grid and one of the fastest growing sectors is energy storage. In this field, customers choose Adderall's industry-leading battery management technology to help maximize available energy, improve system efficiency, extend battery life, enhance safety, and of course improve return on investment (ROI).
However, simply expanding and upgrading traditional power grids is not enough to keep up with the pace of AI infrastructure deployment. In order to speed up the implementation of electricity supply, hyperscalers (hyperscalers) are increasingly exploring dedicated microgrids, which is opening up additional room for growth for Adeno. We believe this trend towards localizing electricity will expand our energy business. The scale of the business has already exceeded 500 million US dollars, and began to show an inflection point in growth in 2025, and has been growing at an accelerated pace this year.
Importantly, our growing position in the energy and data center sector has made us a more critical player in the AI ecosystem, covering the entire power value chain — from power generation, transmission and storage, to power distribution, to rack power and ultimately processor power, which is essentially the “vascular system” of data centers.
Now, when the power grid is connected to the data center, AI's requirements for extremely high energy density and information density make Adeno's deep expertise and innovation in the fields of high-performance power management, sensing and telemetry, and optical connectivity even more critical.
So let me start with our optical business and explain step by step how we can expand our data center business and opportunities by helping our customers solve huge challenges in terms of energy and information density.
When we think about the data transmission process in infrastructure, there are two critical paths: one is an electro-optical data path, and the other is a control path, which guides, optimizes, and ensures the integrity of the data path. Our focus is in the field of control paths, where we've been setting and continuously expanding industry performance boundaries for decades.
Today, the complexity of efficiently transferring data within racks, between racks, and across data center campuses is growing exponentially. Customers increasingly rely on Adderall to provide critical clocking, power management, data conversion, monitoring, and control capabilities to enable lasers and transceivers to operate accurately, reliably, and efficiently, and at the scale required for AI workloads.
As customers seek to further increase the number of optical channels, signal bandwidth, or both to drive network speeds from 800 Gbps to 3.2 Tbps per second, we believe we are in a very good position to benefit from three aspects: first, an increase in the number of pluggable optical modules and coherent optical modules; second, an increase in BOM (Bill of Materials) value; and third, an increase in our market share as these technologies transform and unfold.
As new architectures such as optical switching (OCS) and co-packaged optics (CPO) gain more applications in next-generation large-scale AI clusters, the level of complexity will increase further, and our long-term opportunities will continue to expand. Based on current design wins and customer promises, our OCS revenue is expected to roughly double this year, and we aim to achieve a similar level of growth in 2027. In the nascent field of CPO, we see this as an expansion opportunity for the Serviceable Market (SAM). As cooling and maintainability challenges increase, the importance of ADI's precision control technology has further increased.
So, in a nutshell, the combination of market growth, content expansion, share growth, and differentiated value creation in the data center optics sector has further strengthened our confidence that this business will continue to be a strong growth driver for Adeno in the next few years.
Now let me turn to our power supply business.
Customers need to efficiently and safely convert and deliver more and more accurate electricity at the rack and compute levels, which is driving our entire product portfolio to continue to grow broadly. Customers are using Adderall's products and solutions to drive conversion efficiency of over 98%, achieve multi-kilowatt power delivery, peak power levels of up to 2 times the rated load, and provide comprehensive protection, telemetry, and fault recording capabilities to improve system reliability and maximize uptime.
To illustrate one of the differentiating advantages, the difference between 97% and 98% efficiency may not seem significant, but the 97% conversion efficiency is about 50% higher than the 98% solution due to energy loss through heat loss. This difference will of course accumulate over time, and ultimately reflect the need for additional cooling infrastructure, pressure on equipment, and operating costs.
We believe that as the demand for power density in AI clusters continues to increase, our opportunities will grow significantly. For example, the industry's transformation to an 800 volt DC (800 V DC) power distribution architecture directly fits ADI's expertise and product portfolio in the field of power management.
We have seen a significant increase in customer design adoption of our protection technology and 800 volt to medium voltage power conversion technology. These technologies are capable of delivering 20 kilowatts of electricity at industry-leading power densities of over 2.5 kilowatts per cubic inch.
At the level of intermediate conversion to core conversion, this is one of the fastest growing and largest analog chip opportunities in the AI era. Our combination of advanced power conversion, intelligent system control, and real-time telemetry is critical to achieving the power density, efficiency, and reliability required for the next generation of processors to enable the processor to run at 6,000 amps and less than 1 volt.
Our acquisition of Empower Semiconductor further strengthens ADI's vertical power supply layout, enabling us to deliver power directly into the processor package. In large-scale AI deployments, these architectural advantages can reduce computing power consumption and temperature by about 10% to 15%, which is equivalent to a 1-gigawatt data center saving of approximately $30 million per year.
Like the optical business, our power supply business order pipeline is growing rapidly, and the direction and speed of our R&D investment reflects our judgment on the scale of current SAM opportunities, as well as our confidence that the data center power supply business can continue to be a strong growth engine for the next few years.
Overall, therefore, we believe that the architectural transformation that supports the evolving AI era is enhancing Adeno's position as a key partner in the entire “grid-to-chip” ecosystem and creating huge opportunities.
Our current assessment is that by 2030, the size of our data center and energy SAM will more than double what was anticipated just a year ago. This significant expansion is not just a result of increased capital expenditure (CapEx) for AI infrastructure. It also reflects the impact of new markets and architectures that require orders of magnitude higher analog chip content and are achieved through higher-value solutions.
Now take a step back and look at Adderall's continuous evolution from a larger landscape. “From the power grid to the chip” is only one aspect of the first generation of AI. The applications of the first generation of AI are mainly concentrated in data centers. The growth of automated test equipment (ATE) that we recently talked about during these conference calls is another aspect.
However, although the first generation of AI has had a huge impact on Adeno so far, we still believe that greater opportunities may come from second-generation AI — as AI extends from data centers to the physical world, into ubiquitous fields of robotics, digital medicine, autonomous mobility, etc.
In this emerging new phase, AI must not only support higher levels of learning and analysis, but must also be able to sense, reason, and respond to complex real-world signals in real time. Our ability to address this challenge through products and solutions — that is, using deep physical intelligence to support edge-based reasoning — will enable our AI value proposition to span the entire serviceable market.
The reason Adeno is able to chase this AI opportunity is because our business model has huge choices. This model can not only support the asymmetry of upward growth, but also enhance the resilience of cyclical downside. This choice is based on two foundations: leveraging our cutting-edge technology stack and domain expertise in the field of electrophysical interfaces, and our long-standing relationships with customers.
Our success in the field of AI so far is the latest proof, and I believe the best part is yet to come.
Richard Puccio - Chief Financial Officer and Executive Vice President of Adeno
Third-quarter revenue was US$4.02 billion, above the upper limit of the previous forecast, up 11% month-on-month and 40% year-on-year.
Growth spread across all markets and regions. The industrial business accounted for 49% of third-quarter revenue, up 10% month-on-month and 53% year-on-year. All areas of our industrial business saw year-over-year growth, with ATE, electronic test and measurement, aerospace and defense, and automation leading the way.
The automotive business accounted for 25% of revenue, up 14% month-on-month and 16% year-on-year. Our high global share of content and market share continues to drive growth far higher than SAAR (Seasonally Adjusted Annualized Sales Rate). In key long-term growth areas such as next-generation ADAS and infotainment systems and electric power systems, we are seeing strong diversified performance in terms of both customers and products.
The communications business accounted for 16% of revenue, up 18% month-on-month and 84% year-on-year. Currently, data centers account for 80% of our communications business revenue and continue to grow at an accelerated pace. Among them, the optical and power business both increased by more than 100% year over year.
The wireless business grew more than 25% year over year, and we continue to benefit from cyclical tailwinds.
Finally, the consumer business accounted for 10% of quarterly revenue, which remained flat month-on-month and increased 6% year over year. Despite memory-driven challenges, our diversified consumer business has shown strong resilience. Smartphones, earphones, and wearables all achieved year-over-year growth, while our B2B specialty consumer electronics business grew even faster.
Now let's look at the rest of the income statement.
The gross margin for the third quarter was 72.5%, down 50 basis points from month to month, but increased 330 basis points year over year, mainly due to higher revenue, capacity utilization, and favorable product mix.
Operating expenses for the quarter were US$907 million, and the operating profit margin was at the high end of the previous forecast range, or 50%, up 100 basis points month-on-month and 780 basis points year-on-year, mainly due to improved gross margin and enforcement discipline.
Non-operating expenses were $69 million, and the tax rate for the quarter was 13.1%.
Overall, earnings per share reached the high end of the previous forecast, at a record $3.45, up 12% month-on-month and 68% year-over-year.
Now I want to highlight a few items in the balance sheet and cash flow statement. Cash and short-term investments fell to $2.3 billion, mainly because we successfully completed the acquisition of Empower Semiconductor on July 7, and we paid $1.5 billion in all-cash transactions. Currently, our net leverage ratio is 0.9 times.
As we continue to build a strategic chip inventory to support accelerated demand, our inventory increased by $83 million month-on-month. We had a record balance sheet inventory at the end of the third quarter of fiscal year 2026, while dealer inventory also increased. Despite the increase in inventory, our inventory turnaround days dropped to 156 days, and the channel inventory cycle fell short of our target of 6 to 7 weeks.
Over the past 12 months, operating cash flow and capital expenditure were $5.5 billion and $600 million, respectively. We still expect capital expenditure for FY2026 to be in the range of 4% to 6% of revenue in the long-term model.
Free cash flow reached a record $4.9 billion over the past 12 months, accounting for 36% of revenue. Over the same period, we returned more than 100% of our free cash flow to shareholders through dividends and share repurchases.
Remind everyone that the durability and strength of our financial model allows us to aim for a return of 100% free cash flow over the long term, of which 40% to 60% is used to support annual dividends and the rest is used to reduce the number of outstanding shares.
Now let's take a look at the fourth-quarter outlook. Revenue is estimated at $4.3 billion, fluctuating up and down to $100 million. The median operating margin is expected to be 52%, fluctuating 100 basis points up and down. Non-operating expenses are expected to be around $80 million, with a tax rate of 12% to 14%. Based on these assumptions, adjusted earnings per share are expected to be $3.86, fluctuating up and down $0.15.
Finally, our record results and outlook highlight the company's ability to take full advantage of the cyclical and long-term growth of the AI ecosystem, defense, core industry, and automotive markets. We will continue to balance strict execution with strategic growth investments to address the changing macroeconomic and geopolitical environment while delivering on our attractive financial model.
II. Q&A session
1. J.P. Morgan Chase Analyst Harlan Suhl:
Regarding the strong operating margin guidelines, and the strong gross profit margin implied by this, if I calculate it, the gross margin for October was about 73.5%, which is an increase of 100 basis points. Your current capacity utilization rate is already at a high level. As you mentioned earlier, the main drivers for the future are product mix and sales volume. So, will these two factors drive most of the increase in gross margin by more than 100 basis points in October? Or is the company team implementing more price increase measures, exceeding the actions taken at the beginning of the year, and this may also contribute to strong gross margin performance?
RICHARD PUCCHIO:
As we described, third-quarter gross margin was in line with expectations. In fact, we expect gross margin to increase by about 150 basis points, to about 74%. You're absolutely right, this is mainly driven by a favorable product mix, a higher fixed cost absorption rate — obviously thanks to higher revenue — and our price adjustments.
Looking at the medium term, I would like to remind everyone that we will soon be temporarily discontinuing production in the first quarter, which will drag down gross margins to some extent, and costs are expected to rise further. Inflation continues to be an ongoing factor.
Having said that, not all of the price increases we have announced will be fully reflected in the fourth quarter. As a result, in the first quarter, we'll get a full quarter of shipments, and there will also be some lag as we review our contracts.
Overall, as long as we maintain our anticipated revenue and product portfolio, we expect gross margin to remain close to the level at the end of the fourth quarter.
2. Bank of America Securities Analyst Vivek Aya:
I'd really like to hear your (Vincent Roche) thoughts on the 2027 fiscal year. Looking back over the past two years, I think Adeno's revenue growth has been accelerating almost every quarter. How much of this do you think is long-term growth? How much of it is cyclical growth? How much more comes from pricing? If I simply use the median value of your fourth quarter outlook and assume normal seasonal factors, then this seems to mean at least 20% or more growth after entering the 2027 fiscal year.
So I'm curious to hear your high-level views. Are there any restrictions in any area? Also, if I could ask another related question: If revenue actually increases by 20%, can more operating leverage be released?
Vincent Roche:
I'll sort through the whole story a little bit before Richard can add a few comments of his own.
Since we determined that the market bottomed out in the second quarter of FY2024, our strengths have been mainly reflected in the following areas.
Obviously, we are benefiting from the defense and AI supercycles, and I think this trend will continue for many, many more years. As for the specific growth trajectory, no one knows. Currently, however, aerospace and defense, ATE, and data center businesses account for about 30% of Adderall's business portfolio. Our product portfolio is already exposed to these areas, and I think these areas are expected to achieve higher growth, increase content share, and gain further market share. Of course, we also continue to gain our share in various vehicle types, including fuel vehicles and electric vehicles. In the field of consumer electronics, we achieved a turning point two or three years ago, and now we are also seeing an increase in content share and market share in high-end and mid-to-high-end smartphones, games, earphones, wearables, etc.
I've also mentioned Maxim's synergy several times before. When we announced our acquisition of Maxim, we said we expect a $1 billion synergy. We are now fully on track to achieve this goal. We will achieve approximately $700 million in synergy this year. I expect that by 2027, we will also reach over $1 billion.
As a result, I think the overall cyclical downturn is also very, very strong. Given the breadth of our product portfolio, this will drive overall business growth while compounding the asymmetrical benefits we have.
As Richard mentioned earlier, we currently have a very favorable pricing background. So I think we've grasped these growth directions. I think our product portfolio is more important to our customers than ever before.
I would also like to note that our current delivery cycle is in good shape. As Richard said, we have a record amount of inventory, but at the same time, this inventory has been configured and built in a very targeted manner. This is due to the manufacturing flexibility we have built through our hybrid manufacturing model and our ongoing efforts to expand this capability.
Richard, maybe you could add some more details.
RICHARD PUCCHIO:
I'd like to add that, as we've been discussing the inventory situation, one important factor is that although we see very strong demand, we still believe that customers haven't actually restocked their inventory in the real sense of the word. They still maintain a very lean inventory.
I think the work we've done over the past two years on balancing inventory, whether it's inventory on the balance sheet or channel inventory, has been very helpful. So as we move into the next quarter, we'll continue to allocate more inventory into the channel as growth accelerates there. So I think there's still a lot of opportunity here.
If you look at our consumption patterns, as described by Vincent, the three main long-term growth drivers in our business, you can see real terminal demand. We're seeing a huge increase in AI infrastructure spending. We're seeing growth in the aerospace and defense business.
So if you peel these factors out and look at the broader part of our business, you'll find that most of our business's shipments are still far below historical consumption levels.
So, when we look at the broader market just described, we think we still have room for growth and continue to see strong performance, whether in the cyclical recovery segment or in the aerospace, defense, ATE, and data center businesses.
Vincent Roche:
So, I think overall, we think the company is in a very good position. But I think we're doing the things we can control very well. Of course, a lot can happen on the macroeconomic side. Geopolitical risks are rising, and of course there is the risk of interest rate hikes. As we all know, financial markets fluctuate a lot. AI capital spending is likely to slow down or even fall. But despite that, we expect 2027 to be a year of rapid growth.
3. Stacy Lasgon, analyst at Bernstein Research:
Regarding the data center business, you said that 80% of the current communication business revenue comes from data centers. I think this is very interesting. I mean, the growth of the data center business seems to have almost doubled, or about 100%. So, considering that the vast majority of the communications business is now a data center business, should I regard this growth rate as a reference growth rate for the communications business in 2027? Do you think the communications business should grow close to 100% year over year next year? Also, in this question, it would be helpful if you guys could provide some information on what to expect for this business in the fourth quarter in the near future.
Jeff Ambrosi - Head of Investor Relations and Senior Director of Adeno:
We might start with the recent situation and the outlook for the terminal market, and then let Vincent talk about the future of the AI and data center business.
Basically, under our median outlook, we expect the industrial business to achieve high single-digit growth, and the communications business will lead the way. Obviously, it is mainly driven by data centers. The data center will grow by about 10%; the consumer business will achieve high single-digit growth, and the automotive business will achieve low single-digit growth.
As for how to model data center growth, that's basically the core of your problem. Over the long term, there are several drivers for growth. First, the market itself is very strong. If factors such as capital expenditure are taken into account, the terminal market is experiencing double-digit growth.
More importantly, as Vincent mentioned in this conference call, the BOM value of analog chips is increasing significantly, especially in the process of transitioning to 800 volts and other architectures.
Of course, the investments we are making are also aimed at increasing our market share in many areas. So, at a high level, we expect the data center business to remain strong for the next few years.
Vincent Roche:
Stacey, I don't want to directly give you a specific number for 2027. Our growth rate has almost doubled, and we are expected to double in 2026. My judgment is that the data center market and energy sector will have a continuous growth track until at least 2030, and are expected to achieve strong double-digit growth.
Incidentally, the energy business currently contributes about 500 million US dollars in revenue to Adeno. I think this business will double by the end of this decade.
4. Stifel analyst Tory Svenberg explains:
Vincent, I have a long-standing question about the analog chip industry. Historically, the industry's growth rate has been in the high single digits. But today analog chips are increasingly benefiting from AI infrastructure, and as you said, the future will also benefit from physical AI. Should we assume that the potential underlying growth rate of the analog chip industry is increasing significantly? Is this true in terms of shipping volume or pricing?
Vincent Roche:
Yes, I think that's true. I think the analog chip business is likely to achieve double-digit growth for many years in a row in the next few years. You just have to look at the data center. If we only consider data centers, it is expected that the equivalent of 100 gigawatts of infrastructure will be built between now and about 2031. Each gigawatt can generate 1 billion to 1.5 billion US dollars of analog SAM chips. At the same time, the problems facing data centers are becoming increasingly complex. This will increase the complexity and pricing power of the solution.
So I don't think this is an unreasonable judgment. We stated on our results day in 2021 that we believe our business growth rate will reach 5% to 7%. We are now considering achieving higher growth rates over the next few years.
5. Evercore analyst Mark Lipasis:
If so, I'd like to keep asking this question. Vincent, thank you for giving this double digit increase. The last time Adderall's revenue increased above the long-term trend line of 5% to 7% was in the late 90s and early 2000s of the last century. At the time, people also put forward similar arguments, believing that the construction of the Internet and deregulation of the telecommunications industry would bring huge growth. I'd like to ask Vincent, can you review the situation at the time and compare the long-term structural dynamics you saw today, and how are they different from the dynamics many people saw back then? In the end, analog chip revenue at the time was not just Adnor, but the entire industry fell back to 5% to 7%.
Vincent Roche:
First, since I experienced that period firsthand, I think the market concentration was much higher at the time. What I'm seeing now — if you look at the development of the entire industry over this period — is that more and more intelligence is being introduced into the IT world, and more intelligence is being deployed at the edge. I think this expands TAM and SAM in the analog chip field. As each bit of information is processed, the value of its content continues to increase; as the value of each bit and each watt increases, so does the value of analog chips.
As a result, what we are seeing now is that if we only look at Adderall's company, the breadth, depth, and number of markets we participate in are much larger than in the past. So, as I said in my prepared statement, we've embedded the “right to choose” into the company's business model. We can choose these opportunities, or let the market choose us to seize these asymmetric opportunities. At the same time, we have these businesses that can continue to grow compounded, making the company extremely resilient.
As a result, from our perspective, the industry has become much broader and deeper. Analog chips are also much more important. We believe that in the next 25 or 50 years, significant economic growth will be based on “externalized intelligence” (externalized intelligence). AI is forming a gravitational field that draws everything in.
But I think the popularity of what the entire analog chip industry has to offer today is far higher than in the past. We now have this gravitational field, no matter how cyclical factors may change in the next few years. My judgment is that we have never experienced a cycle like the present before — whether in its breadth and depth, or the gravitational field created by AI, is driving the entire industry forward.
6. Jefferies analyst Britney Curtis:
I want to go back to the data center issue. But I remember you mentioned in the past that AI exposure includes ATE. So I'm wondering how ATE's opportunities should be understood when the data center business achieves three-digit growth when considering growth calculations? I don't know if you guys are willing to disclose the size of it.
Jeff Ambrosi:
You were right in the past; we have always defined AI exposure as ATE plus data center business. Together, the two account for approximately 20% of Adderall's business. Without giving specific growth figures over the next few years, I think we are clearly very confident.
More importantly, this confidence is supported by design project activities rather than just hope and imagination. If you look at our order pipeline, our design activities with our customers are very strong in the ATE field and in the data center business as a whole, not only in power supplies, but also in optics.
I think you've just heard the relevant content of Vincent's prepared statement. At a high level, Adeno's business, which accounts for about 20%, has had a very strong growth spurt, and we think this will continue for many years.
Again, this confidence comes from our design activity, order backlog, order pipeline, and order growth momentum.
7. Cantor Analyst Matthew Prisco:
Now everyone is talking a lot about the very strong demand background for the next few years. So, as revenue continues to rise, how should we view Adeno's current supply capacity? Under what circumstances do we need to start considering increasing production capacity? Are there any current restrictions in the supply chain? Or do you guys see any potential areas of stress as we move forward?
RICHARD PUCCHIO:
I'll answer first, then Vincent can talk more about the long term part.
From our perspective, our supply chain execution is truly outstanding. As we've always discussed, we've had 9 consecutive quarters of higher-than-seasonal growth and are currently leading the 10th quarter. We are continuing to build up our inventory, which reflects our ability to expand our in-house production capacity.
As we said before, we're continuing to install new equipment in the available space while also getting more wafers from outside. As a result, we consider ourselves to be in a very good position in terms of immediate and medium term needs.
Obviously, there are still some areas of weakness across the industry, and delivery cycles have begun to lengthen, but we are working very hard to control this situation. Of course, the extent to which demand is currently accelerating is unprecedented in recent history. But we think we're in a very good position.
As we've always said, our order shipment ratio (book-to-bill) is above 1, but it hasn't reached an abnormally high level. Additionally, it helps our manufacturing efficiency. We now have slightly better visibility, and some orders take longer to deliver. Frankly, we're also asking our customers to help us do this. This allows us to make more accurate use of existing production capacity. So we think we're in a good position. As the business grows, we will continue to increase production capacity.
Let me add one more point. We are planning scenarios to analyze what the future may look like if this growth continues, and consider how to balance through a hybrid manufacturing model, including increased external wafer procurement, and whether additional production capacity is needed in addition to the capacity expansion currently being implemented and has been ongoing for the past 3 to 4 years.
Vincent Roche:
I'd like to add that not only will we continue to expand our in-house manufacturing capabilities, but we also have many excellent external partners. We have partners in front-end and back-end manufacturing. We are planning together with these partners to take a long-term perspective on how to support all of Adeno's key nodes. From photo-insensitive nodes — if you like to call them that — nodes of about 6 microns, all the way up to 5 nm and 3 nm. This is exactly what we did during the pandemic cycle. Now, we're just continuing to expand the capabilities of this hybrid manufacturing system. This is our strategy for the future.
Also keep in mind that a few years ago, people predicted that the entire semiconductor industry could reach $1 trillion by 2030. But now that goal is a thing of the past. We're looking ahead to a much larger market. As a result, the entire industry is facing a very, very important task: to catch up with what we currently believe is a new growth trajectory, including Adderall.
8. TD Cowen analyst Joshua Butchart explains:
Congratulations to the company for its very strong performance and guidance. The 74% gross margin outlook is amazing, and we are back at our peak level in 2022. Moreover, this was not accompanied by much additional capacity utilization leverage. From a larger perspective, is this a level that you think you can maintain and continue to grow on top of throughout the cycle? Also, how do you prioritize revenue growth and profit margins over the long term? If there is such a ranking, then is the gross margin level of around 70% a goal you want to maintain for a long time?
RICHARD PUCCHIO:
As I said before, I do think we can keep growing — sorry, I meant continuing to stay around 74%.
Meanwhile, we will continue to focus on growth investments. I also said in my last conference call that we will continue to focus on growth investments, some of which may put some pressure on profit margins as we expand our investment in revenue growth.
However, when you look at our product portfolio, and the part of the product portfolio that continues to grow, the opportunity to maintain this level of profit margins still exists.
As you said, we have reaped significant benefits by keeping the plant at a higher rate of capacity utilization. We expect this high utilization rate to continue throughout the entire upward cycle. So we feel great.
We will balance the investments needed to achieve growth while maintaining this level of profit margins relatively. I said this last quarter, and I'll repeat it here. For example, I don't think we can get a significant additional profit margin increase in capacity utilization. However, our industrial business still accounts for only 49%.
As a result, if the product mix changes, there is room to rise, or at least offset potential headwinds. Because another thing that will happen is that we expect the inflationary environment to continue. We'll continue to monitor, track, and follow this as before. But I do think we're in a pretty balanced position right now in the medium and long term.
Vincent Roche:
I just wanted to add one more point. The root of the high gross margin structure is the innovation premium we can get. Our mission is to keep this premium moving forward. At the same time, cyclical factors will help us improve manufacturing efficiency, etc. So these two points are very important. One is clearly very strategic, and the other is operational.
However, we believe that these two parts will have a lot of room for development for many years to come. Our customers are asking us to solve more difficult problems and take on more work. And our high-performance product portfolio is well-positioned in terms of breadth and depth, enabling us to continue to build the early stages — the source of gross margin — as part of Adderall's value proposition.