Analog Devices Inc. (NASDAQ:ADI) 13th Annual U.S. All Stars Conference Call September 20, 2022 5:00 AM ET
Company Participants
Vincent Roche – Chief Executive Officer
Michael Lucarelli – Investor Relations
Conference Call Participants
Harlan Sur – JPMorgan
Harlan Sur
Welcome to JPMorgan’s 13th Annual U.S. All Stars Conference here in London. We’ve got a great lineup of companies over the next couple of days. My name is Harlan Sur; I’m the semiconductor, semiconductor capital equipment, chip design software analysts in the U.S. And kicking off our conference for the first time is the team from Analog Devices. We have Vincent Roche, Chairman and Chief Executive Officer of Analog Devices. And then sitting in the back there, we also have Mike Lucarelli, Vice President of Investor Relations and FP&A.
And for those of you that don’t know Analog Devices, leadership position in mixed signal, RF semiconductors, leadership position in power management, strong position in signal chain processing; both analog and digital, which is the technology that we all know bridges the digital to the physical world. Financials, best-in-class gross operating free cash flow margins and a very, very diversified business, right; industrial, automotive, communications infrastructure represents 85% plus of the company’s total revenue.
So Vince, thank you for joining us here today.
Vincent Roche
Thank you, Harlan. Great to be here. Good morning, everybody.
Harlan Sur
So the way that the format is going to work is, I’ll start off with the first sort of 35 minutes of fireside chat, and then I’ll turn it over to you for any Q&A. So Vince, let’s start with sort of the longer term. Congratulations because the team is celebrating 57 years of being in the business this year, right? And you’ve got a strong track record of industry growth.
So looking back over the past 15 years, the team has grown revenues at an 8% CAGR or about 30% to 40% faster than the overall semiconductor industry. You’ve grown your earnings at an 11% to 12% CAGR over that period of time. And some of the growth has been organic, but most of it — some of that growth has been inorganic, but majority of that has been organic. And then on a go-forward basis, at the most recent Analyst Day, the team is targeting 7% to 10% growth annually, earnings growth at 10% to 11%; this would be roughly twice the expected growth of the industry. So help us understand how the team has leveraged its leadership position in high-performance analog, RF, power and signal processing to build a pipeline that supports above-market growth profile in all of your core markets?
Vincent Roche
Great. Thank you. Yes. So if I kind of step back a decade or 12 years ago, we always had a great technology story as a company, leader in data converters, which are kind of the bridge between the either physical and digital world. But we decided about a decade ago that what we really wanted to do with this company was position ourselves at the heart of the B2B sector. So industrial being the biggest piece of that. That’s about 50% of our business today and also attack the most attractive segments of communications like base stations, for example, wireless wireline connectivity. So backhaul and metro long haul for optical systems, for example. Obviously, automotive and consumer, they are the big blocks of the company. And so we reconfigured the whole R&D stream. We’ve always had a very innovation-centered mentality in the company. But then we started to tackle the most important problems across those phases.
And — we have many — I mean, we cover many hundreds of different applications in those major areas. We have 75,000 product SKUs. We’ve actually got 100,000 with Maxim. We’re investing EUR 1.5 billion in R&D per year. And we really differentiate the company, I think, on the innovation quality of what we do. We add a lot of value to the semiconductor. There’s a lot of artistry in what we do. And we’ve got a very, very customer-centered profile as well. We’ve had customer intimacy and innovation are really the 2 levers that we use within this company to drive ourselves forward. So we’ve been through the years, over the last decade, we’ve increased our average selling prices by 4 to 5x. And that was again driven by the — our desire to manage the complexity that our customers deal with, bring it inside, boil it down and develop more sophisticated solutions for our customers.
So today, I think we’re very well positioned. We’re playing in the right spaces. We’ve got a lot of momentum on the innovation side, the customer engagement side. And I think — I’ve been in the business now for about 40 years. I was an intern with ADI around 40 years ago. And what I can tell you is that this industry now is positioned with more concurrent secular growth drivers than at any point in its past. And as we push towards the Intelligent Edge, I think this company is even better positioned than we’ve ever been in our past history. So, I’m very bullish about the future for the company.
Harlan Sur
Yes. And we’ll dig into a lot of the dynamics around that. We tend to think about the analog team along the lines of leadership in analog and power, which you do have a very strong position. But I feel like the market tends to forget that you have a strong position in digital signal processing, and you and I are talking to this before the event started about our time in the industry. And I remember my time in the industry, I tend to remember ADI more for its position in digital signal processing, right? And in fact, our team is still a leader in DSP processors and many of your mixed signal and RF solutions have embedded DSP capabilities with a lot of software programmability. So help us understand how critical DSP and software plays in being a strong differentiator for your solutions? And maybe even give us a few examples?
Vincent Roche
Yes. So, good question. If you look at 5G radio systems today, we have leading position in building at the radio interface. And on something the size of your fingernail, we have produced multichannel transmit receive capability. We’re able to take RF signals, convert them into the world of digital. And we do a lot of digital signal processing as well. So it’s not just providing the hardware to our customers, but we also have a lot of algorithmic technology that is based upon the digital foundation that we developed all those 35 years ago there, but you’re quite right that one of the — we’re one of the early movers actually into the area — era of digital signal processing. And in these 5G radio systems, we have not only all the analog mixed signal power, but we also have tens of MCUs, RM MCUs on board with fixed function digital signal processing and a lot of algorithmic value.
So the algorithms, the software signal processing algorithms, they add a tremendous amount of additional value to enable us to get more ASP for the hardware combined with the software. — battery management systems for electric vehicles, we have a leading position there. Same thing; we’re producing not only all the sophisticated metrology to be able to accurately understand the charge, discharge performance of a battery, but we provide the security, the connectivity stacks. So these are very, very complicated chips that are very consistent with who we are by identity is the leading purveyor of solutions between the world of physical and digital.
Harlan Sur
And of your R&D capabilities, are you finding that over the years that more and more of your R&D capabilities are focused on software and algorithm development?
Vincent Roche
Yes. If you look at the last decade, when you produce a processing franchise like our DSP Shark, for example, it is the kind of the brand of our DSP franchise these days, that assumes that you also build a lot of software capability but build the tool chains, the algorithms and so on and so forth. In terms of skill sets within the R&D system at ADI over the last decade, we’ve had a lot more systems people. So we have several hung out systems people, systems engineering people who understand radio architectures very deeply or I can understand how to really qualify the chemistry used in electric litigal batteries, for example, and be able to, in a very fast away connect the physical world of these elements into the world of digital.
And the second piece that we’ve added is from systems engineering, there’s a lot more software capability and headcount in the company over these past 10 years or so.
Harlan Sur
Great. Let’s maybe focus on something that’s been topped most on investors’ mind. So the U.S. chipset bill was passed recently. EU has a very similar subsidy program in place. And the key focus is to motivate more manufacturing in U.S. and EU with the goal of driving manufacturing leadership as well as better business continuity planning practices in terms of supply chain diversification, geopolitical risk mitigation you guys have fabs, both in the U.S. and Europe, and you’re a key supplier into the aerospace and defense industry with many key program wins and you’re a key supplier into most, if not all, of the global industrial, automotive, comm infrastructure value chain. So the analog team appears to be in a great position to secure some of this funding. How is the team thinking about these government initiatives and your ability to capture these subsidies?
Vincent Roche
Well, first off, ever before the chips act was passed, we’ve invested about $1 billion internally over the last couple of years to build out semiconductor fabrication capability in our factories in Ireland locally here across the RFC as well as our Beaverton, Oregon and Camas, Washington fab. So we’ve been making sure that we secure ADI’s manufacturing needs and the footprint that we need at 18 nanometers and above — so we’ve done that without chips act funding. And we’re taking a very, very hard look now at the resiliency of our supply chain at kind of 90 nanometers and below. We flagged as well to our investors that we expect to see an increase in CapEx in our manufacturing operations over the next few years. And so clearly, any activity we take upon ourselves to build more resiliency in our manufacturing model. chipset funding either in Europe or America is something that we will we’ll be in conversation on.
But what I will tell you as well is that as a company, we have a hybrid manufacturing model. We’re not intending to build everything that we need inside ADI. We’ve had a very successful partnership with many of the brand name foundries over the last several years. So we intend to work in a collaborative way with these vendors for the next several years. But there’s a certain amount of ownership that we want to make sure that we’ve got the hybrid model that we need covered from the smallest geometries to the largest drug entrees.
Harlan Sur
How the past 2.5 years have been interesting, right, the COVID-19 era? And I’m curious as to how the conversations with your customers have changed over these past 2.5 years of just supply-driven COVID-driven demand and supply volatility. I’m sure that your customers are somewhat disappointed somewhat frustrating about supply and pricing increases. But on the other hand, I mean, I believe this has motivated them to provide you with more visibility on their mid- to longer-term demand profiles as well as maybe share their technology road maps with you on a go-forward basis. So when a customer comes calling, I mean, what are these more recent conversations like?
Vincent Roche
Yes. Good question. Well, there’s a tremendous consistency. There are kind of 3 questions. I’ve talked with the CEOs of many of the largest IT companies across the planet in the last 2, 2.5 years during the crunch. And the 3 questions are: — number one, how do we get more supply? That’s a very short-term thing. And I think we’ve done well as a company, making sure that we’ve evenly balanced the needs of our customers across our broad markets as well as our vertical markets. And then the second question is, how do we get closer to your R&D road maps for the long term? And how do we get security a strong sense for security of supply for the long term. And I have continuous conversations with our customers across those 3 elements. But I think with the capacity that we’ve brought online over the last 6, 12 months, the first part, the short-term part has been, I think, getting into better and better shape.
But if anything has happened over these last couple of years in the psychology of the industry, in which we play, the customer side of it — it’s that I think semiconductors were taken for granted — now everybody realizes that semiconductors are the bedrock of modern socio and economic life. And all our customers want some level of mastery at the C-suite level. I think, as I said, it was taken for granted. Now everybody realizes that, for example, the modern day automobile is built upon the value proposition is built on semiconductors and software. So — and I think that’s true across the spectrum. So we’re very well positioned, I believe, given the breadth of what we do, the innovation focus that we have and our desire to get closer and closer to our customers.
Harlan Sur
The team has been participating at a number of different investor conferences over the past couple of weeks. And Prashant, our CFO, has been pretty visible there. And I think he’s addressed a lot of the near to midterm question. So, I’m just going to — I do want to ask you one near to midterm question. I’m not going to dwell on it because that has been answered over the past couple of weeks. But from a near-term perspective, exiting the just reported July quarter, the team drove record quarterly results, positive book-to-bill, your backlog grew sequentially to north of $12.5 billion. That’s one year’s worth of revenue visibility, clearly stretching into next year. You did discuss to seeing a deceleration of orders near the end of the July quarter. You also did see a slight uptick in cancellations. Although your core in auto and industrial segments continue to show strong order momentum. Has the deceleration in orders continue to this quarter? Has the level of cancellations continue to rise?
Vincent Roche
Well, what we’ve seen — we talked about at the earnings call. We have seen cancellations uptick but nothing extraordinary whatsoever. And our backlog remains very, very strong. And what we pay a lot of attention, we run the company on a POS basis. So we run our factories based upon sell-through, not so in. And — what I think we mentioned as well on the call several weeks ago that right now, we see PMIs, the PMI in — yes is a very strong indicator of how orders will modulate over time. And clearly, the PMIs are — they’re softening, I would say. And that says something about what we can expect, I think, in terms of growth, at least in the short and medium term.
Harlan Sur
You — in some of your opening comments, you talked about the changes of the business the refocusing of into different diversification of end markets, technology and products and so on. How has the overall business change over the past decade to better weather the next down cycle, wherever it be next 2023, 2024 and so on?
Vincent Roche
Well, I think, number one, if you look at the financials of the company, the — what we believe to be our trough margins now where our peak 5, 7 years ago. So that’s a big, big change. and that’s by virtue of the diversity that we have, the inherent strength in the gross margin structure of the company. And we’ve modeled the business as well with — if we had a significant decline in the top line, we’ve got the shock absorption ability now in the Capes to be able to take a significant top line decline and produce operating profits with a — just pick a number, 15% top line decline, which would be pretty extreme. But the gross margins of the company as well should be in the 70% area and the operating profits in 4 and above; so that’s a big change.
And as I said, we’re focused on markets that value the technologies that we have, and we’ve better — tremendous diversity, as I said, about 100,000 product SKUs 125,000 customers. And we got — we’re well paid for the innovation that we generate. So that structure, the business model restructuring the financial restructuring of the company, I think, puts us in a very good position to be able to continue to play our lung game irrespective of what the short term brings, we’ll be able to focus on our long game from an innovation, customer engagement perspective and make the capital investments that we need as well.
Harlan Sur
And I feel like one of the other ways the team is driving more predictability and resilience of the business and the financial profile during periods of either stronger or weaker than expected demand is to focus on your hybrid manufacturing model, right? You touched upon this a little bit. Help us outline the hybrid strategy, the benefits in periods of weak demand and stronger demand? And where you are today in the outsource versus in-source mix? And where do you expect to take that mix as you execute the hybrid strategy over the next few years?
Vincent Roche
Yes. So there are 3 primary activities in making products in our industry. One is you’ve got to build the silicon, the semiconductor manufacturing process itself. We make about 50% of our goods inside on the 4 fabs inside of ADI. And we buy the remaining 50% from some of the top contract manufacturers or the fabs out there like TSMC and so on. Our assembly technologies are acquired. We don’t — we do very, very little of that inside the company. We do — the majority of our final tests we do inside ADI. There’s a certain amount of intellectual property value of doing that inside. And the real benefit of the hybrid model is that when demand surgeons. We have capability to — we have a certain footprint inside the company. We can fill our fabs here inside ADI and turn to our external partners to give us the upside that we need in terms of supply. And then the inverse, when the market turns, demand drops, we make sure that we keep our internal fabs loaded, which gives us strong utilization and gives us resiliency in terms of the gross margins, cost of goods. So that’s essentially the hybrid model. And it gives us optionality and gives us resiliency.
Harlan Sur
Is the team already sort of at its optimized is 50-50 sort of your optimized mix right now on the wafer manufacturing side?
Vincent Roche
Well, with the additional investments, Harlan, that we’ve made in our internal fabs over the last couple of years, we have more option to do more internally. And we need that footprint extension to be able to meet the growth clarity company between now and the end of the decade.
Harlan Sur
Given the supply constraints over the past 2.5 years, pricing has been strong and continued strong into next year. And we’ll continue to — we continue to hear about foundry wafer price hikes next year and still see input cost inflation and some logistics challenges. Does the team still anticipate corresponding price hikes into next year in parallel with these rises in input costs? And maybe more from a longer-term perspective, you’ve talked about a flattish ASP profile versus low to single digits kind of decline sort of pre-pandemic. What’s the confidence level in that? And why wouldn’t we see pricing drop off in a down cycle next year to normalize kind of pre-COV9 sort of annualized declines?
Vincent Roche
Well, ADI has — given the franchise that we’ve got — the substitution costs in our business are very, very high. So when we get a design win with a customer in the industrial sector, those design sockets will last for 17 years on average. And if you look at the total profile of the company, 50% of our revenue comes from products that have been released to market in the last — the past 10 years, and 50% of our products are 10 years to 5 years. So, I think there is tremendous stability from — fundamentally in the pricing structure of the company. And over the past 5, 7 years, we’ve been more systematically managing pricing to be able to extract more value for the things that customers care about. And in the past couple of years, we are truly now in the period of this is post-Moore’s Law — the post-Moore’s Law era; so we went from [indiscernible] 30 years, 35 years of consistent price decline in the industry. We’ve made up for the declines through growth but I think we are now in a period of sustained inflation in the business.
And what we’ve done in the last couple of years is just past the cost of good changes that we’ve had in the business from our suppliers. And that’s our intention there. We’re not trying to, if you like, boost the margin — we’re just passing cost back on. Very hard to predict what will happen next year or the year after. But I think for the future, the industry is in a period of sustained natural normal inflation.
Harlan Sur
On the supply side, we often hear this as a concern from investors, which is one of your larger analog competitors is ramping up capacity here in the second half of the year, into next year. How should we think about the supply-demand imbalance given new capacity additions by competitors or by foundries? And does the team see any competitive dynamics from this impact?
Vincent Roche
I think in general, if you look at where all the attention has been around chip sac, where the investments have been going and building fab capabilities and foundries over the past 5 years, it’s really all been 40-nanometers, 7, 5, 3 and so on and so forth. The analog business, as I said earlier, is largely centered between 40 nanometers and up to 7 row. There hasn’t been much in the way of global investment in the — in building capabilities in those areas over the last 5 or 7 years. Hence, the reason that we’ve built more of that ourselves internally. But I think we’ll see more capacity come over the next 3 to 5 years within those sweet spots in the analog sector.
And let me give you an example. In the average automobile today, about 85% of the silicon used in cars is 14-nanometers in the boom. And I think we’ve largely forgotten in the race to build the most advanced deep of Micron capabilities. We’ve kind of forgotten the analog sector to some extent, but I think that will correct in the next 2, 3, 4 years.
Harlan Sur
Yes. It’s interesting because we cover GlobalFoundries, who’s one of your foundry partners, and they’ve done some extensive modeling and their view is that if you look at all of the CapEx plans by their competitors, some of your competitors and so on, at some of these 40-nanometer and above capacity expansion plans, their view is that capacity is going to continue to come online, but it’s going to continue to come online at a level below demand for the next few years. Given your discussions with some of your other foundry customers and your expansion plans and what you see from competitors, do you feel the same way?
Vincent Roche
Yes. I think there’s a natural lead time from the time you make a decision to the time you bring on capability capacity, that’s 2, 3, 4 years. So I think just given the depth of investment over the past 5 or 7 years, the next 3 or 4 years, I think we’ll see a certain amount of tightness in that 40-nanometer upward area.
Harlan Sur
On the Maxim acquisition, it’s looking like it’s going to be a home run for the team. It added a significant amount of power management capabilities. They had a little bit more of an application-specific focus as well. And the ADI team laid out revenue synergies with the Maxim portfolio of about $1 billion across 3 focus areas over the next 5 years. And one of the biggest revenue drivers is the mid-level power market, which will add $3 billion to $4 billion of incremental SAM opportunity for the team. How should we think about the market share aspirations and specific end markets where the team can exploit its portfolio here and drive strong content attach opportunities.
Vincent Roche
Well, we’re off to a great start, Harlan. As I said at the start of the conversation here, ADI’s Heritage has really been the signal processing data converter side of things. We didn’t have until we acquired LTC, a strong power management portfolio. And we’re very pleased with the cross-selling, the cross connectivity of power with our signal chain from the LTC franchise. And the indication so far as well on the Maxim side is that we’re more competitive. We’ve got better cost structures in the power area. We’ve got more manufacturing optionality built in. So I think the target of being able to double our market share in the power area to the end of the decade. I think it’s highly achievable, given the strong established high-performance portfolio that ADI has in orphan microwave, data converters, sensors and so on. Power is a very natural extension of that.
And one of the — when I talk with our customers, one of the things that everybody is focused on these days is making energy efficiency, a bigger and bigger piece of their product offerings, whether it’s communications or industrial. And given the portfolio that we have, that makes us very, very attractive in terms of being able to solve those energy consumption problems in data centers, industrial automation, cars and so on.
Harlan Sur
Let’s go into some of your focused end markets starting off with automotive. In automotive, the growth portion of the business, right, you described some of the battery management for electric vehicles. You’ve talked about audio processing and audio connectivity, data and video connectivity, all of these 3 segments growing at about 35 — they represent about 35% to 40% of your auto business and is expected to grow at about a 20% year-over-year growth over the next few years. In BMS, obviously, strong number one position. You’ve got 4 OEM design wins for your wireless BMS solution. The largest customer there is GM. They’re expected to continue to scale very aggressively, like describe the trends in electric vehicle and in-car what are driving the strong demand trends for your solutions here? And what are the big differentiators that you bring to the table?
Vincent Roche
Well, in the automobile sector, as I said earlier, everybody now realizes that semiconductors and software, the value creation engine in the car. And the move from ultimately the combustion engine to the electric vehicle, that’s very good for us. We have a very, very small share of business in the combustion engine, it’s very de minimis. So everybody is focused on making the electric vehicle extending range, the safety and stability of the batteries and so on. When we acquired LTC 5 years ago, that business was about $50 million a year. We see that getting to $1 billion in the next few years. We’re well on track to do that with a tremendous tailwind from the EV market. But then, in the — in Cabin electrode — we’ve had a franchise for many, many years at mid- to high end with our DSP franchise that you referred to earlier. So a lot of audio signal processing, voice and audio.
And we not only do the processing of the signals themselves. There’s a lot of new modalities like zones of silence, so active noise cancellation is becoming important in both electric and combustion engine cars and being able to move media around the car as well requires sophisticated busts. Everybody wants to reduce weight, why make the wiring harness is simpler for cost, reliability, weight and so on and so forth. So we have a very strong position whether it is moving signals from vision radar systems for autonomous driving, assisted driving and so on and so forth as well as moving with our A2B bus moving audio signals and power actually across those wires as well around the car. So to be able to solve those very complex problems that requires a lot of silicon artistry. And we have many, many thousands of parts in our portfolio now that we sell across the globe into all those different applications in cabin as well as the electric vehicle.
Harlan Sur
Industrial; that’s 50% of your overall business, extremely diversified business, spanning factory automation, health care, instrumentation and test, aerospace and defense. And at your Analyst Day, you provided examples of your content gains and SAM expansion opportunities. Help us understand how we should think about the different subsegments from a long-term growth perspective. And should we face a potential macro slowdown? I mean what segments within Industrial should remain resilient versus segments that should follow the trend if we — the negative trend if we do see a slowdown.
Vincent Roche
Yes. So there are many components to the industrial business. So let me try and unpack a ton for you. We have — I would say, the 2 themes that are most transcendent and probably, to some extent, cycle resilient, aerospace and defense. That’s a significant business for ADI as well as health care. And both of those are running about 7% or 8% each of the total revenue of the company. And the health care business for ADI, we’re in the early stages of digitalization of health care. And that’s been growing at 10% or 11% compounded for the last several years. So I expect to see that continue for a number of different reasons. Aerospace and defense, well, I think that speaks for itself, certainly the defense power. We’re seeing strong demand. And I do expect, given the — many of the unfortunate things happening across the globe here that, that business will continue to be very resilient.
Aside from that, we have our instrumentation business, so that’s a mix of big iron testers for the semiconductor industry for smartphones and so on and forth. That’s a business where we’ve been gaining a lot of share over the last several years. It’s a very, very high-performance sector. And then there are 2 subsectors of that scientific instrumentation and electro lab equipment. So many, many thousands of customers in those areas. So there is a level of stability in those areas. And last but not least, is the industrial automation side of things. That’s a significant part of ADI’s revenue is well around 10% or 12%, I think, of total revenue today. And that’s all the brand name robotics companies across the entire gamut of applications. And with inshoring — reshoring [ph], we expect that business to become strengthened over the next several years.
So overall, industrial is about 50% of indeed revenue. It is truly the core of what we do. It’s the first call on our R&D capital as a company. And it uses every piece of technology across those application sectors that I’ve just mentioned to you. So it’s highly diversified, tens of thousands of customers and a very, very important part of the identity of ADI.
Harlan Sur
Perfect. I want to make sure that we address any questions that we have from our clients on here. If you have any questions, raise your hand, and I would just ask if you just want to wait for the microphone. Questions anyone?
Unidentified Analyst
Thanks. I think NXP last week, maybe a couple of weeks ago talked about they kind of provided a number on what they thought was potentially the double ordering in their backlog. Do you guys have any views on that or any specific numbers around the magnitude of that or if you’ve seen any of that?
Vincent Roche
Well, what I can tell you is that the length of our backlog now is I haven’t seen backlog stretch as long into the future as I now see. Very, very hard to say, short term, what’s real, what’s not real. There is a certain amount of backlog. I have no doubt about that, driven by the shortage anxiety. Putting a number on it is very, very difficult. But what I can tell you is that it’s stretching for a much longer period of time. And as I said, we watch the signals very carefully as a company. And with PMIs moving as there, I expect that some of the backlog in the nearer term will probably move. Thanks.
Harlan Sur
Any other questions?
Unidentified Analyst
Yes. I just want to bring order to ask your thoughts on China in general. What are your long-term thinking there? What are you seeing on the ground? How do you see any start-ups that you might be concerned over the longer term? Because I’ve been hearing A lot of mixed signals, again, what would it be Infineon, — would it be an XP, et cetera? Just curious your axes generate about that market…
Vincent Roche
We’ve been in business 57 years. So we’ve had competition come at us. We established the data converter sector. So we’re not new to competition. What I can tell you is that, in general, where high performance is needed in the things that we do, ADI will be the first choice. There are many hundreds of start-ups in China right now in the semiconductor side. But I believe as long as we play our game, play it to a high level in terms of innovation, customer support, supply chain support, ADI will be transcendent there for many, many years.
Unidentified Analyst
Just want to because in a little bit. I mean I still environment in trying to say the different special the U.S. right in China Yes. So I don’t know how much it really depends on us thing versus what’s actually happening on the jet — so I’m curious whether that had any competition in your thinking. I mean, again, we’ve here, we hear something you don’t want to media on U.S. government getting concerned where the GPUs are going essentially. But then again, the area of your defense exposure, that where your components are going to be going venture. So, just kind of like what’s your thinking along these lines?
Vincent Roche
Yes. Look, I mean the geopolitical environment doesn’t make it easier to do business there. That’s for sure. But I think within China, as I said, a lot of indigitization is going to take place. Chinese semiconductor manufacturers doing their own thing. So it will be a tougher environment, that’s for sure, competitively in the future. But again, we keep an innovation premium. We keep a performance premium in our portfolio as long as there is a need for high performance. Maybe there are trade-offs that can be done where lower performance can be used, more indigenous sources of supply. But it’s certainly tougher. I mean our communications business, in particular, over the past 5 years, given the blockages on technologies that has that’s been quite tough for ADI, but we’ve been able to fill the gap by participating more deeply in industrial as well as the automotive sector.
Unidentified Analyst
Just quickly, in terms of supply demand in that region, specifically, how different is that what you see in Europe and the U.S. Because at least what I’ve been seeing is, okay, we hear when we get for 12 months or to get a car, put it that way. In China, from the looks of the car is available within a few days, essentially, the Tesla model is available there. Discount started to come through. So it obviously tells you that the supply is a little more readily available in the region than — is that what are you experiencing that?
Vincent Roche
I think so. I mean if you look at the pandemic certainly, in 2020, China was able to kind of run through the pandemic, was able to run more kind of a more consistent manufacturing activity. And that included supply chain as well as being able to get products. My sense is there might have been some boarding as well in China on the supply side of things. But I think it’s been strong and very, very consistent through the pandemic.
Harlan Sur
Question over here.
Unidentified Analyst
First question, you spoke briefly about your workers, which is the industrial and automotive sector. I was wondering how do you see the telecommunication one. So we have seen companies like Verizon this year put a stop on their CapEx spending. I mean what do you actually see as a main driver in the next 3, 5 years, also speaking, related to the 5G rollout? And the second question, if I may, is what about your shareholders’ policy? I mean I don’t know the company, but based on this chart, it seems that your CapEx sales is around 5%, 6%, more or less. I mean — what do you see in terms of buyback in terms of dividend distribution for the next, again, 2, 3 years? So…
Vincent Roche
Yes. But let me start with the second part first. We have committed to returning 100% of our free cash flow after we’ve serviced debt and so on and so forth. We’ve been very consistent with our dividend now for several years. And we will continue to improve the rate of return on the dividend. We’ve been growing at about 10% for the last few years. We will continue to do that. and do a certain amount of stock buyback as well. In terms of communications, the telecom side of things, yes, look, we’re all reading the same press about a slowdown in CapEx spending. One of the things that’s been surprising to me on the 5G side of things is that the great promise of that technology is that it can move way beyond the consumer. And what I’m beginning to see is 5G private networks for 5G being established now in areas like industrial automation. So that’s the great. I believe the great long term, if you like, sustainable trend for 5G. The consumer side of it is always going to be more lumpy. Data centers, an important part of what we do as well. We’re looking at that given particularly our power management portfolio, a good opportunity for ADI for the longer term, where we’re not so strong today.
Harlan Sur
Last question from here.
Unidentified Analyst
Just tied into the China question. How do you see the impact from the rejiggering of global supply chains due to — well, either the supply chain issues as a result of the pandemic or the geopolitical issues, either for you or your customers?
Vincent Roche
Well, I think you’re going to see strengthening of investments in Europe as well as America. I think that’s without question. So a certain amount of concern about the geopolitical situation in the eastern part of Asia. But I think you’ll see, generally speaking, more announcements on building semiconductor capability in both America and Europe.
Unidentified Analyst
But it will take a long time before that it’s really complete, right?
Vincent Roche
Yes. We these fabs are 3 years is very, very typical. It takes time.
Harlan Sur
Great. Well, with that, we’re just about out of time. Vince, thank you very much for participating today. I’m looking forward to another strong year of financial execution by the team. Keep up the good work.
Vincent Roche
Thank you. Enjoyed the conversation. Thank you, Harlan.
Harlan Sur
Thank you.
Question-and-Answer Session
End of Q&A
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