President and Chief Executive Officer at Analog Devices
Thank you, Mike, and very good morning to everybody. So, ADI delivered a second consecutive quarter of record revenue and earnings. Despite the challenging supply environment, our strong performance was driven by continued operational excellence and insatiable demand as semiconductors power the modern digital age.
Broadly speaking, the economic recovery continues to take shape with demand still far exceeding supply. We, like many others in our industry, will face a constrained supply environment into 2022. Despite this backdrop, our business continues to achieve record results as our investments and design wins over the last few years are matched with strong demand across our end markets. So looking ahead, the combination of robust bookings, lean inventories, and ongoing capacity additions position ADI to close fiscal '21 on a high note and continue to grow in the next year.
So moving to our third quarter results. Revenue was $1.76 billion, up 21% year-over-year. All markets increased sequentially, with industrial and automotive once again achieving records. Gross margin expanded to over 71%, and operating margin over 43%. Adjusted EPS of $1.72 increased 27% year-over-year. Despite elevated capital spending to increase our capacity, free cash flow over the trailing 12 months was $2.2 billion. This equates to a 34% free cash flow margin, maintaining our position in the top 10% of the S&P 500. So overall, I'm very pleased with our performance and our team's outstanding execution.
As you know at ADI, our ethos of innovation and deep customer engagements ensure that we stay ahead of what's possible. We invest more than $1 billion annually in R&D, focused on strengthening our core franchises and capturing market opportunities presented by secular growth factors, which have accelerated in the economic recovery.
Now let me share some recent highlights with you. Our industrial business is our most diverse segment across customers, products and applications and features sticky long product life cycles. Our largest industrial segment, instrumentation and test, is comprised of automated test equipment, electronic test and measurement, and scientific instruments. This is truly a performance-driven market that aligns perfectly to our high-performance precision signal chain, power management and RF portfolios.
Importantly, instrumentation and test is aligned with all secular growth trends from connectivity to EVs to sustainability. The growing technology complexity of these applications requires more testers with more advanced performance capabilities. Today, ADI is the leader in communications tests, and we're collaborating with Keysight for example to advance the development of ORAN solutions. This partnership will enable the fastest path for designing cost-effective and power-efficient radio units. Looking ahead, we are already beginning to partner with our customers to test emerging 6G technologies.
Our innovations in the instrumentation market also have a positive impact on human and planetary health. One particular area is our environmental monitoring business, where there is an increased need for highly reliable and accurate instruments to improve the standard of living globally. Our market-leading portfolio of precision converters enables 10 times greater measurement resolution of fine particulate matter, better identifying trace pollutions.
The next largest industrial segment is factory automation. Over the last year, many of our customers are rethinking their factory floors and supply chains to make them more resilient, cost-effective and flexible through automation and connectivity. To achieve this, our customers will further automate their businesses with intelligent and connected factories and increase their use of robots and cobots.
Specifically, cobots require ADI's precision signal chain and power franchises, sensing technologies, and robust wired and wireless connectivity. This new vector of growth increases our SAM opportunity by three times that of a traditional robot. To that end, our precision motion control business is on track for a record year of design wins, including a recent win at a leading Japanese robotics company for its next-generation cobots. In addition, we are leveraging our domain knowledge and system-level expertise in a collaboration with Universal Robots to design smaller, smarter and easier-to-use robots that help scale tasks safely and transform workforces.
Well, turning now to our communications business. 5G is beginning to broaden globally, especially in North America, as carriers look to deploy newly acquired C-band spectrum and ORAN continues to gain momentum also, with several of the largest European carriers setting ambitious 2025 ORAN deployment targets. This includes Vodafone, where our technologies are very well represented.
This quarter, we extended our market-leading position in 5G radio solutions with the introduction of the industry's first software-defined transceiver that includes a fully integrated digital front end. Our innovative radio architecture greatly improves power efficiency, thereby reducing radio weight, size and carrier expenses. This high level of integration eliminates FPGAs to simplify implementation and facilitate the proliferation of these emerging ORAN networks. Our next-generation transceiver platform is already designed in at a major Tier 1 global supplier that is gaining share in these 5G and ORAN deployments across North America as well as Europe.
Stepping back, we expect our communications business to return to growth in 2022. We have strong design momentum and our geographic mix has shifted with North America, Europe and Korea representing our largest sources of revenue.
Moving now on to automotive. Over the last two years, we've realigned our business to focus on electrification and in-cabin human experience. We're seeing the benefits of this strategy, as we continue to scale our market leadership in battery management, power management, audio systems and connectivity.
Starting firstly with our battery management systems, or BMS. Our wired and wireless portfolios provide unmatched accuracy to deliver market-leading vehicle range and can measure all key battery chemistries, including zero-cobalt LFP. Additionally, our solutions incorporate ASIL D functional safety and an ultra-low power continuous monitoring feature that ensures the battery remains stable even while parked, which is the first in the market.
In addition, this quarter marked the first time we recognized revenue for our wireless BMS solution, as General Motors prepares to ship its first of 30 EV models powered by the Ultium battery platform. And this is just the beginning for this groundbreaking BMS technology, as OEMs realized the power of wireless data in scaling their fleets.
Turning to audio systems and connectivity, as complexity continues to increase. There is very strong demand for our market-leading audio systems with signal processing, A2B connectivity, and active road noise cancellation. Our solutions offer the highest fidelity performance in the market, while reducing vehicle weight, removing nearly 100 pounds per vehicle. During the quarter, two leading OEMs adopted A2B and a Top 3 European vehicle manufacturer implemented A2B as its audio connectivity standard across its entire fleet.
In total, A2B is now designed in over 30 OEMs, including 18 of the Top 20 global automotive companies. Furthermore, interest in our active road noise cancellation feature continues to intensify. We are designed in at nine OEMs, up from five just a year ago, including Hyundai and a leading EV manufacturer. This added capability can more than double the value of our A2B solution.
In all, these are just a few of the countless examples of the tremendous work underway at ADI. We remain focused on delivering breakthrough innovations to stay ahead of our customers' needs.
So in closing, I have never been more confident about ADI's future. Over the last decade, we've built an industry-leading portfolio with unparalleled breadth and depth of capabilities that's aligned with more profitable end markets and our portfolio and leadership position will only get stronger with the acquisition of Maxim, enabling us to deliver strong returns in the years to come.
And so with that, I'll hand you over to Prashanth.