# How Analog Devices makes money

CXProWealth Business Lens · Analog Devices (ADI) · Q3 FY2026

Read from the 10-Q for the period 2026-05-03 to 2026-08-01, filed 2026-08-19 with the SEC (accession 0000006281-26-000073): https://www.sec.gov/Archives/edgar/data/6281/000000628126000073/

Business Lens explains how a company earns, spends and keeps its money, from its own filings. It is insight and context, never a view on the shares, a target, or advice. Figures are raw units as filed; percentages are percentage points.

## Headline figures

- Revenue: $4.0B (+39.6% on the year)
- Operating income: $1.6B (operating margin 40.1%)
- Net income: $1.3B (net margin 33.3%)
- Gross margin: 67.3%
- Free cash flow: $1.5B (36.3% of revenue)
- Cash conversion (operating cash flow / net income): 1.20x
- Capital expenditure: 3.6% of revenue

## Where the money goes (Q3 FY2026)

- Revenue → Cost of sales: $1.3B
- Revenue → Gross margin: $2.7B
- Gross margin → Total operating expenses: $1.1B
- Total operating expenses → Research and development: $533.5M
- Total operating expenses → Selling, marketing, general and administrative: $397.3M
- Total operating expenses → Amortization of intangibles: $188.0M
- Special charges, net → Total operating expenses: $24.2M
- Gross margin → Operating income:: $1.6B
- Operating income: → Total nonoperating expense (income): $67.1M
- Total nonoperating expense (income) → Interest expense: $88.7M
- Total nonoperating expense (income) → Other, net: $3.7M
- Interest income → Total nonoperating expense (income): $25.4M
- Operating income: → Income before income taxes: $1.5B
- Income before income taxes → Provision for income taxes: $205.8M
- Income before income taxes → Net income: $1.3B

## Where the revenue comes from

### RevenueFromContractWithCustomerEndMarket (Industry and Segment Information - Schedule of Revenue Trends by End Market (Details))

| Member | Value | Share |
|---|---:|---:|
| Industrial | $2.0B | 49.0% |
| Automotive | $998.2M | 24.8% |
| Communications | $654.5M | 16.3% |
| Consumer | $397.2M | 9.9% |

The members sum to total revenue.

### ContractWithCustomerSalesChannel (Industry and Segment Information - Schedule of Revenue by Sales Channel (Details))

| Member | Value | Share |
|---|---:|---:|
| Distributors | $2.3B | 57.9% |
| Direct customers | $1.6B | 39.5% |
| Other | $106.2M | 2.6% |

The members sum to total revenue.

## Income statement, as filed

| Line | Q3 FY2026 | Of revenue |
|---|---:|---:|
| Revenue | $4.0B | 100% |
| Cost of sales | $1.3B | 32.7% |
| **Gross margin** | $2.7B | 67.3% |
| Research and development | $533.5M | 13.3% |
| Selling, marketing, general and administrative | $397.3M | 9.9% |
| Amortization of intangibles | $188.0M | 4.7% |
| Special charges, net | -$24.2M | 0.6% |
| **Total operating expenses** | $1.1B | 27.2% |
| **Operating income:** | $1.6B | 40.1% |
| Interest expense | $88.7M | 2.2% |
| Interest income | ($25.4M) | 0.6% |
| Other, net | (-$3.7M) | 0.1% |
| **Total nonoperating expense (income)** | (-$67.1M) | 1.7% |
| **Income before income taxes** | $1.5B | 38.4% |
| Provision for income taxes | $205.8M | 5.1% |
| **Net income** | $1.3B | 33.3% |
| Shares used to compute earnings per common share – basic (in shares) | 486,021,000 |  |
| Shares used to compute earnings per common share – diluted (in shares) | 488,837,000 |  |
| Basic earnings per common share (in dollars per share) | $3 | 0.0% |
| Diluted earnings per common share (in dollars per share) | $3 | 0.0% |

## History

| Period | Revenue | Operating income | Net income | Operating cash flow | Capital expenditure | Free cash flow |
|---|---:|---:|---:|---:|---:|---:|
| FY2007 | $2.5B | $568.7M | $496.9M | $820.4M | $141.8M | $678.6M |
| FY2008 | $2.6B | $625.0M | $786.3M | $669.4M | $157.4M | $512.0M |
| FY2009 | $2.0B | $284.8M | $247.8M | $432.1M | $56.1M | $376.1M |
| FY2010 | $2.8B | $900.1M | $712.1M | $991.2M | $111.6M | $879.6M |
| FY2011 | $3.0B | $1.1B | $867.4M | $900.5M | $123.0M | $777.5M |
| FY2012 | $2.7B | $824.0M | $651.2M | $814.5M | $132.2M | $682.4M |
| FY2013 | $2.6B | $753.1M | $673.5M | $912.3M | $123.1M | $789.3M |
| FY2014 | $2.9B | $752.5M | $629.3M | $871.6M | $177.9M | $693.7M |
| FY2015 | $3.4B | $830.8M | $696.9M | $907.8M | $154.0M | $753.8M |
| FY2016 | $3.4B | $1.0B | $861.7M | $1.3B | $127.4M | $1.2B |
| FY2017 | $5.2B | $1.2B | $805.4M | $1.2B | $204.1M | $950.3M |
| FY2018 | $6.2B | $1.9B | $1.5B | $2.4B | $254.9M | $2.2B |
| FY2019 | $6.0B | $1.7B | $1.4B | $2.3B | $275.4M | $2.0B |
| FY2020 | $5.6B | $1.5B | $1.2B | $2.0B | $165.7M | $1.8B |
| FY2021 | $7.3B | $1.7B | $1.4B | $2.7B | $343.7M | $2.4B |
| FY2022 | $12.0B | $3.3B | $2.7B | $4.5B | $699.3M | $3.8B |
| FY2023 | $12.3B | $3.8B | $3.3B | $4.8B | $1.3B | $3.6B |
| FY2024 | $9.4B | $2.0B | $1.6B | $3.9B | $730.5M | $3.1B |
| FY2025 | $11.0B | $2.9B | $2.3B | $4.8B | $533.6M | $4.3B |

Latest trend (the newest full year against the year before; a reading, not a forecast):

- Revenue: +16.9% (year before -23.4%): accelerating
- Operating income: +44.3% (year before -46.8%): accelerating
- Net income: +38.7% (year before -50.7%): accelerating
- Free cash flow: +37.0% (year before -12.2%): accelerating

## Operating figures stated in the filing

- Days sales outstanding: 50 days (as of 2026-08-01). "Days sales outstanding* 50 44" (Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations)
- Days sales outstanding: 44 days (as of 2025-11-01). "Days sales outstanding* 50 44" (Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations)
- Days cost of sales in inventory: 131 days (as of 2026-08-01). "Days cost of sales in inventory* 131 130" (Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations)
- Days cost of sales in inventory: 130 days (as of 2025-11-01). "Days cost of sales in inventory* 131 130" (Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations)

## Key insights

### Operating income nearly doubled on 39.6% more revenue

Costs grew far slower than sales, so operating income rose 97.2% and operating margin reached 40.1%, up from 28.4% a year earlier.

Revenue rose 39.6% to $4.02B from $2.88B. Cost of sales rose only 20.5%, so gross margin widened 5.2 points to 67.3% from 62.1%. The filing attributes the gain to 'higher utilization of our manufacturing fixed costs as a result of increased customer demand' and a favorable mix of products sold into its end markets. _(from the filing)_
Below gross margin the pattern repeats. Research and development rose 17.4% and selling, marketing and administration 22.0%, both slower than revenue, and amortization of acquired intangibles was flat at $188.0M against $187.4M. Operating income rose 97.2% to $1.61B from $818.0M. _(from the filing)_
For scale: operating income of $1.61B in this one quarter equals 55.0% of operating income for the whole of the last fiscal year, $2.93B. _(from the filing)_
Our reading: most of the extra revenue reached operating income because the cost base that produces it, factories, engineers and amortization, stayed close to where it was. That is operating leverage, and the filing's own explanation for the gross margin gain points to the same cause. _(analysis)_

### Net income outran operating income because of the tax line

Net income rose 158.5% against 97.2% for operating income, mainly because the effective tax rate fell to 13.3% from 32.1%.

Income before income taxes rose 102.5% to $1.55B, close to the 97.2% rise in operating income. Net income rose 158.5% to $1.34B. The difference is tax: the provision fell 16.0% to $205.8M from $244.9M while pre-tax income roughly doubled, so the effective rate was 13.3% against 32.1%. _(from the filing)_
The filing explains both rates. The year-earlier quarter carried a net deferred tax expense tied to the One Big Beautiful Bill Act. The current rate sits below the U.S. statutory rate because of lower statutory rates in the foreign jurisdictions where the company earns income. _(from the filing)_
Special charges also turned into a net gain of $24.2M, which the filing attributes mainly to the sale of a subsidiary in Penang, Malaysia. It sits inside operating income but is small next to it, 1.5% of $1.61B. _(from the filing)_
Our reading: net margin of 33.3%, against 18.0% a year earlier, overstates how much the business itself improved. Operating margin, up 11.7 points to 40.1%, is the cleaner measure, since the tax rate depends on where income is earned and on a transfer pricing dispute the company is contesting. _(analysis)_

### Fuller plants need little new capital spending

Capital spending took 3.6% of revenue, against 10.3% in the last peak year, leaving free cash flow of $1.46B, 36.3% of revenue.

Capital spending was $145.7M in the quarter, 3.6% of revenue of $4.02B, against $79.2M, 2.7% of revenue, a year earlier. In the last peak year the company spent $1.26B on plant and equipment, 10.3% of revenue of $12.31B. In the most recent full year it spent $533.6M, 4.8% of revenue. _(from the filing)_
With little going back into plant, free cash flow was $1.46B, a free cash flow margin of 36.3%. Operating cash flow of $1.60B was 1.2 times net income of $1.34B, helped by amortization of acquired intangibles, a non-cash charge added back in the cash flow statement. _(from the filing)_
Our reading, which the filing does not state: the heavier spending of the peak year added capacity that is now being filled. Higher utilization, which the filing credits for the margin gain, has come without a matching rise in capital spending, so added volume is reaching cash as well as profit. _(analysis)_
Cash does not track profit every quarter. In the prior quarter operating cash flow was $872.0M, below net income of $1.18B. Days sales outstanding rose to 50 from 44 at the last fiscal year end, which the filing attributes to higher sales and the timing of collections and billings. _(from the filing)_

### Competitive edge

- **Distributors carry a broad industrial customer base** Industrial brings 49.0% of revenue and distributors handle 57.9%, while selling and administrative costs take only 9.9% of revenue.
- **Research spending held steady as revenue surged** Research and development rose 17.4% to $533.5M while revenue rose 39.6%, so its share of revenue fell 2.5 points to 13.3%.
- **Cash held up when profit fell** In the last downturn year free cash flow was $3.12B against net income of $1.64B, with non-cash amortization of acquired intangibles part of the gap.

### What to watch

- **Fixed factory costs also deepen downturns** In the last downturn year revenue fell to $9.43B from $12.31B, while gross margin dropped to 57.1% from 64.0% and operating margin to 21.6% from 31.1%.
- **Growth runs through distributors and slower collections** Distributors take 57.9% of revenue and days sales outstanding rose to 50 from 44, so end demand is harder to read from orders.
- **Tax and cyber exposures sit outside reported results** The 13.3% tax rate faces an IRS transfer pricing assessment the company disputes, and a June cyber incident is still under investigation.

## Investor view

**Fuller factories lifted Analog Devices' operating margin to 40.1% as revenue rose much faster than costs**

### How it makes money

Analog Devices sells semiconductors into four end markets. In the quarter, Industrial brought in $1.97B, 49.0% of revenue of $4.02B. Automotive added $998.2M (24.8%), Communications $654.5M (16.3%) and Consumer $397.2M (9.9%). The company assigns each sale to a market using the product's technical characteristics and the end application it goes into, and reclassifies earlier periods when that assignment changes. _(from the filing)_
Most revenue reaches customers through other companies. Distributors, which the filing defines as customers that buy 'with the intention of reselling them', accounted for $2.33B, 57.9% of revenue. Direct customers, mainly original equipment manufacturers, accounted for $1.59B (39.5%). The remaining $106.2M (2.6%) came from the U.S. government, prime contractors and customers whose revenue is recorded over time. _(from the filing)_
The products sell well above what they cost to make. Gross margin was $2.71B, 67.3% of revenue. From that, the company spent $533.5M on research and development (13.3% of revenue), $397.3M on selling, marketing and administration (9.9%) and $188.0M amortizing intangible assets acquired with past purchases (4.7%). Operating income was $1.61B, an operating margin of 40.1%. _(from the filing)_
Little of that profit has to go back into plant. Capital spending was 3.6% of revenue, leaving free cash flow of $1.46B, a margin of 36.3%. Operating cash flow of $1.60B was 1.2 times net income of $1.34B; amortization of acquired intangibles, a non-cash charge, is added back in the cash flow statement. Diluted shares fell to 488.8M from 496.7M a year earlier as the company repurchased stock. _(from the filing)_

### What shifted

Revenue rose 39.6% to $4.02B from $2.88B a year earlier, which the company attributes to 'broad-based demand across end markets'. Within Industrial every sub-market grew, led by test equipment and aerospace and defense. In Communications the strongest growth came from data center, 'driven by artificial intelligence-related infrastructure investments'. Over the last three quarters revenue went from $3.16B to $3.62B to $4.02B. _(from the filing)_
Cost of sales grew 20.5%, about half the pace of revenue, so gross margin widened 5.2 points to 67.3% from 62.1%. The filing gives two reasons: 'higher utilization of our manufacturing fixed costs as a result of increased customer demand' and a favorable mix of products sold. Gross margin in dollars rose 51.3% to $2.71B. _(from the filing)_
Operating costs also grew slower than revenue. Research and development rose 17.4% and fell 2.5 points to 13.3% of revenue. Selling, marketing and administration rose 22.0% to $397.3M, a smaller 9.9% of revenue, despite including transaction costs for Empower Semiconductor, acquired during the quarter. Amortization was flat at $188.0M. Operating income rose 97.2% to $1.61B, and operating margin rose 11.7 points to 40.1%. _(from the filing)_
Net income rose 158.5% to $1.34B, faster than operating income, for two reasons the filing names. The effective tax rate was 13.3%, against 32.1% a year earlier, when the company recorded a deferred tax charge tied to the One Big Beautiful Bill Act. And special charges turned into a net gain of $24.2M, mostly from the sale of a subsidiary in Penang, Malaysia. Diluted earnings per share were $2.74, against $1.04. _(from the filing)_
Growth absorbed working capital. Days sales outstanding rose to 50 from 44 at the end of the last fiscal year, which the filing attributes to higher sales and the timing of collections and billings. Days of inventory held at 131, against 130, as the company built inventory 'to support increased demand'. _(from the filing)_

### Risks in the filing

The one risk factor the company updated this quarter is cybersecurity. It disclosed a June incident in which files were exfiltrated from some systems. Operations were not interrupted and, on what it knows so far, the company does not expect a material impact, but it says its investigation 'remains ongoing' and that its assessment could change. It also says its own use of AI tools can add exposure, for example through malicious code in AI-generated code. _(from the filing)_
The filing lists recently announced and future tariffs, other trade restrictions and changes in export classifications among the factors that could make results differ from expectations. It also names manufacturing delays, raw material availability and supply chain disruptions, which bear on a company that runs its own factories and sells worldwide. _(from the filing)_
It names changes in demand for semiconductor products, the performance of independent distributors, and products being diverted from its authorized distribution channels. Distributors are its largest channel, so these risks sit next to the largest share of revenue. _(from the filing)_
The IRS has assessed additional tax for two earlier fiscal years over transfer pricing with a foreign subsidiary. The company 'firmly disagrees', has recorded no added liability and is preparing an appeal, but says an adverse outcome could have a material effect on tax expense and net earnings in future periods. The filing also lists risks from its indebtedness and from integrating acquired businesses, which applies to Empower. _(from the filing)_
Of these, the numbers show the demand and channel risks most directly, though this quarter in the favorable direction: growth ran through distributors and receivables lengthened. The cyber and tax risks do not appear in this quarter's income statement, since the company judges the incident not material and has not booked the disputed tax. _(analysis)_

## Founder view: mechanisms

### Owned factories turn volume into margin

A large part of the cost of making chips is fixed: the fabs, the test floors and the people who run them cost about the same whether the plant runs full or half empty. When orders rise, each extra unit adds little cost, so gross margin climbs faster than revenue. When orders fall, the same cost is spread over fewer units and margin falls harder. Analog Devices makes much of what it sells, so its margin moves with how full its plants are. _(analysis)_

### Distributors carry the long tail

Industrial customers are many and varied: instrument makers, factory automation builders, defense suppliers, each ordering modest volumes of many parts. Serving all of them directly would take a sales force the size of the market. Distributors keep parts on their shelves, extend credit and handle small orders, while the company's own engineers win the design. Once a part is designed into a product that ships for years, reorders flow through the distributor at little added selling cost. _(analysis)_

### Steady research, spread over more revenue

Analog parts tend to stay in production for many years, so a design that wins a socket can keep earning long after the work is done. The company keeps research spending on a steady path rather than moving it with each quarter's orders, and calls it the source of product leadership. When revenue jumps, that spending becomes a smaller share of sales and the difference falls through to operating income. _(analysis)_

### Acquired intangibles put cash above profit

Analog Devices grew in large part by buying other chipmakers. Accounting spreads the price paid for their technology and customer relationships over years as amortization, a charge against profit that uses no cash. Reported profit therefore understates the cash the business produces, and the gap is widest in the years after a large deal and when revenue is weak. _(analysis)_

## Member research

Signed-in members read, on the page: what Analog Devices's numbers depend on from here, and the playbook behind each mechanism (what needs scale, what transfers, how to test it, the metric that would show it).

## Sources

- Analog Devices 10-Q for the period to 2026-08-01: https://www.sec.gov/Archives/edgar/data/6281/000000628126000073/ (2026-08-19)

Methodology business-lens-1.0 · schema 1.2.0 · run business-lens-2026-11-02 · as of 2026-11-02