Good morning and welcome to the Analog Devices' Second Quarter Fiscal Year 2022 Earnings Conference Call, which is being audio webcast via telephone and over the web.

I would like to now introduce your host for today's call, Mr. Michael Lucarelli, Vice President of Investor Relations. Sir, the floor is yours.

Michael Lucarelli - Vice President of Investor Relations and FP&A

Thank you, Katrina, and good morning everybody. Thanks for joining our second quarter fiscal 2022 call. With me on the call today are ADI's CEO and Chair, Vincent Roche; and ADI's CFO, Prashanth Mahendra-Rajah. If anyone who missed the release, you can find it and relating financial schedules at investor.analog.com.

On to the disclosures, the information we're about to discuss includes forward-looking statements, which are subject to certain risks and uncertainties, as further described in our earnings release and our periodic reports and other materials filed with the SEC. Actual results could differ materially from the forward-looking information as these statements reflect our expectations as of the date of this call. We undertake no obligation to update these statements, except as required by law.

Our comments today will also include non-GAAP financial measures, which exclude special items. When comparing our results to our historical performance, special items are also excluded from prior periods. Reconciliations of these non-GAAP measures to their most directly comparable GAAP measures and additional information about our non-GAAP measures are included in today's earnings release.

And with that, I'll turn it over to ADI's CEO and Chair, Vincent Roche. Vince?

Vincent Roche - Chief Executive Officer and Chair of the Board of Directors

Thank you, Mike, and very good morning to you all. Well, I'm very pleased to report that ADI delivered another quarter of record revenue, profitability and earnings driven by continued insatiable demand for our products, strong operational execution and accelerated synergy capture. Moreover amidst a dynamic macro environment, we're operating from a position of remarkable strength supported by our record backlog, robust bookings and ongoing capacity expansions, which position us favorably as we enter the second half.

Now moving to a summary of our results, revenue was $2.97 billion above the high end of our outlook, and up 28% year-over-year on a pro form basis. Strength was broad based with all segments up double digits year-over-year. Impressively, adjusted gross margin expanded to 74% and operating margin to 50%, adjusted EPS was $2.40 exceeding the high end of outlook and increasing over 50% from the year ago period.

Overall, I'm very excited with our performance and our teams' outstanding execution. Today, I'd like to reinforce what we shared at our Investor Day, around how our markets are evolving, and how we're investing to solve more of our customers' problems while also improving on our business model. That's both rich with growth opportunities and indeed resiliency.

The next wave in the evolution of the ICT sector is the nascent intelligent edge revolution. It'll be characterized by ubiquitous sensing, hyperscale computing and pervasive connectivity, pushing processing, and intelligence closer to the edge. Semiconductors are the bedrock enabling this next wave and ADI, where data is born is at the center of this revolution.

At our core, we are an innovation-driven enterprise. Over the last decade, through both robust organic investments and strategic M&A, we've built the industry's broadest and highest performance analog mix signal and power portfolio. Our offering span from microwave to bits, nanowatts to kilowatts, sensor to cloud, and increasingly from components to subsystems, our vast arsenal of technologies, along with the deep level of engagement and support we provide our customers has earned us the number one positions in analog mix signal, RF and high-performance power. This coupled with our focus on customer success, awards ADI with an innovation premium that is reflected in our ASPs that are more than three times the industry average and also industry-leading gross margins.

The growing scope of our customer's products is dramatically expanding and complexity and pressuring their product development teams and innovation cycles. To meet these challenges and deliver the next waves of disruptive innovations, we're investing over $1.6 billion in R&D annually. These investments strengthen our broad market franchise and enable us to expand our SAM in vertical applications for more complete solutions are necessary. We achieved this by integrating our core analog technologies with increasing levels of digital algorithms and software.

Now let's look at how our technology is intersecting with our markets. Industries like transportation, energy, telecoms, manufacturing, and healthcare are prioritizing digitalization. This is driving new generations of applications and fueling a host of concurrent secular growth trends. And I'd like to touch on just a few now.

Starting with automotive, here ADI is the market leader in battery management systems, for example, for EVs. Our battery management systems or BMS solutions offer customers the highest levels of accuracy, reliability, safety and security. Our wireless BMS solution offers all the benefits of wired, but also enables rapid battery packed configurability and cost effective scaling of our customer's EV fleets. This innovative solution continues to gain traction in the market and adds to our content per system, by up to two times.

Moving to telecommunications where ADI is the market leader in radio signal chain for 5G with a majority share across the ecosystem. Our latest generation transceiver includes a fully integrated digital front-end and grows our SAM by two times. This innovative radio architecture of reducing system cost and weight and improves power efficiency. Further, the flexibility of these software-defined solutions allows them to be used across traditional 5G networks, as well as in emerging Open-RAN and LEO satellite networks.

Lastly, healthcare, we have a number one position with dominant share in medical imaging, for example. Subsystems like our Photon-to-Bits module are used by the top CT players in the world. Our solution delivers the highest fidelity images while decreasing radiation dosage. And in the process, it allows us to capture four times the sun compared to offering just components alone.

In addition to expanding our innovation edge across these secular trends to amplify growth, the maximum combination creates $1 billion revenue synergy opportunity for us over the next five years. The first opportunity arises from customer cross-selling, leveraging our complimentary relationships to pull through our extended portfolio. Second is fusing together the new product roadmaps of these two premier analog portfolios to push the boundaries of what's possible. And third is power management. Here, the combination with Maxim increases our breadth of power capabilities, creates a more cost competitive portfolio and adds to our engineering talent pool.

As a result, we unlock $4 billion of additional power SAM, and look to double our power revenue in the years ahead. The proliferation of the intelligent edge and our revenue synergy opportunity gives me great confidence that we can bend the growth curve upwards moving from our historical mid-single digits growth rate to our new model of 7% to 10%.

Now I'd like to speak a little to the unique resiliency of our business. The diversity of our portfolio is a source of great strength. We ship 75,000 product SKUs, which support thousands of applications to over 125,000 customers. Notably, 80% of our revenue is derived from products that individually contribute no more than 0.1% of total revenue. And the longevity of our products is unmatched, on average, our products of lifespans of a decade or more, effectively delivering recurring revenue streams for decades. As these characteristics that create a high barrier to entry and an enduring business model.

Finally, we utilize a geographically diverse hybrid manufacturing strategy to tame the complexity and fragmentation of the analog market. This strategy provides us with a broad array of technology and packaging necessary to create innovative solutions from seven nanometers to seven micrometers. At the same time, this model creates a diverse network of internal and external partners to best manage our operations through economic cycles.

As we mentioned at our Investor Day, we're investing in our internal manufacturing operations to build a more robust and cost effective model. To that end, we're doubling the capacity of our internal factories and adding significant capital to our product test operations. These investments will grow our output this year and into 2023 and increase our swing capacity across our network to over 70% of revenue.

So in closing, ADI is a leader in innovating at the edge, and I believe that our best days are still ahead of us as we drive increased value for our customers, shareholders, and society. And with that, I'm going to pass it over to Prashanth, who take you through the financial detail.

Prashanth Mahendra-Rajah - Executive Vice President, Finance and Chief Financial Officer

Thank you, Vince. Let me add my welcome to our second quarter earnings call. It was great to see and hear from so many of you at our Investor Day last month. And it was also exciting to welcome so many of our customers to demonstrate our technologies in action. As usual, my comments today with the exception of revenue will be on an adjusted basis, which excludes special items outlined in today's press release.

We printed another very impressive quarter with record revenue, profitability, and earnings. These strong results reflect increasing demand for our highly differentiated products aligned to multiple secular trends, as well as our ability to leverage our hybrid manufacturing model offset inflation and accelerate synergy capture.

Second quarter revenue of $2.97 billion, finished above the high end of our outlook with every B2B end market, exceeding initial expectations, this marks our fifth consecutive quarter of record revenue and our ninth straight sequential growth period. So let's look at the performance by end market. Industrial, our most diverse and profitable end market represented 51% of revenue and hit another all-time high. We experienced broad based growth with digital healthcare, automation, instrumentation and test leading the way, underscoring increasing content and our strong position in the secular markets.

Industrial has now grown more than 20% year-over-year for six straight quarters. Automotive, which represented 21% of revenue also achieved another record with all applications growing double digits year-over-year. In BMS, where we hold the number one position, our quarterly revenue eclipsed $100 million for the first time. We expect strong growth to persist given the momentum in the market and our continued design wins. Additionally, our A2B and GMSL solutions, which together make up roughly 20% of automotive, continued on the secular growth path fueled by the digitalization of the automobile.

Communications represented 16% of revenue with robust, broad based growth. In wireless, we experienced growing demand across our RF portfolio as 5G deployments, particularly in North America, gain momentum. ADI's latest generation transceiver, which Vince spoke to, is ideally positioned to capitalize on the virtualization trend. In wireline, demand for our optical and power products remain strong as carriers and hyperscalers invest to meet the ever growing demand for bandwidth.

And lastly, consumer represented 12% of revenue and has now grown year-over-year for six straight quarters. This consistent growth is a function of our product and customer breadth, which better insulates us from the typical fluctuations associated with PCs and portable devices. Now onto the P&L, gross margin was a record 74.2%, increasing 230 basis points sequentially and 330 basis points year-over-year. Favorable product mix, high utilization and revenue growth and synergy fall through were key drivers of the increase.

Opex in the quarter was $710 million better than anticipated owing to faster synergy execution. Record operating margins of 50.3% grew 450 basis points sequentially and 860 basis points year-over-year. At the end of the second quarter, we've realized over $250 million of cost synergies. We looked to quickly achieve the remaining synergies and hit our recently increased target of $400 million in savings, exiting fiscal '23. Non-op expenses were $41 million and the tax rate for the quarter was 13.2%. All told adjusted EPS came in at a record $2.40, up more than 50% versus the second quarter 2021.

And now onto the balance sheet, we ended the quarter with approximately $1.7 billion of cash and equivalents. Days of inventory increased sequentially to 122, and channel inventory remains below the low end of our seven to eight-week target. If we look at cash flow, capex for the quarter was $119 million and $447 million over the trailing 12 months or 5% of revenue.

To support our accelerated 7% to 10% long-term revenue growth outlook, we are strategically investing to expand internal capacity while enhancing the resiliency of our hybrid model. To that end, as we stated at Investor Day, we expect capex as a percentage of revenue to be in the high single digits during fiscal '22 and '23 before reverting back to 4% to 6% over the long-term. And over the trailing 12 months, we generated $3.2 billion of free cash flow or 33% of revenue. Included in our free cash flow, our one-time transaction related costs amounting to about 3% of revenue.

Given the recent market weakness, we accelerated our repo activity to $776 million during the second quarter. This brings our total share repurchase to approximately $3.5 billion since the close of Maxim. And we look to maintain this accelerated buyback pace this quarter and achieve our $5 billion commitment by the end of our fiscal year. As a reminder, we target 100% free cash flow return. We will allocate 40% to 60% of our free cash flow to support a 10% dividend CAGR throughout the cycle with the remaining cash used for buybacks to reduce share count annually.

And now onto the outlook for third quarter, revenue is expected to be $3.05 billion plus or minus $100 million. We expect all end markets to grow sequentially. Given our higher than normal annual merit increase, operating margin is expected to be 49.5% plus or minus 70 bps. And our tax rate is expected to be between 13% and 14%. Based on these inputs, adjusted EPS is expected to be $2.42 plus or minus $0.10. While we are very mindful of the current economic trends, our demand indicators remain very strong and our customer conversations remain upbeat, giving us confidence for continued growth for the remainder of 2022 and likely into 2023.

Importantly, as a result of our vast diversification, leadership in numerous secular growth markets, additional synergies and our resilient hybrid manufacturing model, we believe ADI has never been better positioned to transcend cyclical downturns and accelerate long-term growth.

Let me now give it back to Mike to start the Q&A.

Michael Lucarelli - Vice President of Investor Relations and FP&A

Thanks, Prashanth. Let's get to our Q&A session. [Operator Instructions] With that, Katrina, give our first question, please.

Question & Answers

Operator

[Operator Instructions] Our first question comes from Tore Svanberg with Stifel. Your line is open.

Tore Svanberg - Stifel - Analyst

Yes. Thank you. Congratulations on all the record results and especially on that 50% operating margin. My question is for Vince. Vince, towards the end of your remarks, you talked about growing output to increase swing capacity to 70% of revenues. Could you perhaps elaborate a little bit on that and what is sort of the timeline exactly for when you would hit that number?

Prashanth Mahendra-Rajah - Executive Vice President, Finance and Chief Financial Officer

Yeah. So as you know, Tore, we've been investing in our internal semiconductor manufacturing operations from 0.18 micron upwards, and we're doubling the output there over the next - over the next year or there about a year - 15 months. And of course, we cross licensed technologies with some of our foundry partners. So when we talk about 70% swing, it means that because we will have cross qualified so many process technologies between ADI internal fabs and the external fabs that are controlled by our foundry partners. We get the ability to move utilization, if you like from one place to another, depending on what part of the cycle we're in, in terms of managing utilization inside ADI and being able to meet the demands as it surges or declines.

Tore Svanberg - Stifel - Analyst

Great perspective. Thank you.

Vincent Roche - Chief Executive Officer and Chair of the Board of Directors

Thanks, Tore.

Operator

And your next question is from Stacy Rasgon with Bernstein Research. Your line is open.

Stacy Rasgon - Bernstein Research - Analyst

Hi guys. Thanks for taking my questions. I wanted to ask about the gross margins. You mentioned a bunch of drivers, but you actually didn't mention pricing at all in your outlook there for the drivers. So, I mean, what impact has pricing had either to offset inflation or to potentially reprice the Maxim portfolio after the closure? And I guess, how do we think about the forward gross margin trajectory at these current like revenue levels? I mean, can - is there room for it to even go up from here, assuming the revenue levels kind of stay on the current trajectory?

Prashanth Mahendra-Rajah - Executive Vice President, Finance and Chief Financial Officer

Good morning, Stacy, thank you for the question. So as you know, we along with the rest of the industry, I think, has been passing along the higher costs. We have been very focused on not using this environment to take advantage of our customers, but to really maintain our gross margins. So in '21, we had some headwinds from the timing of inflation, versus when we were able to enact the pricing. This has really abated in '22. So really the gross margin percentage or the growth in gross margin percentage that you see is really being driven as I mentioned by the synergies, great utilization at the internal fabs and some mixed benefits. I think in my prepared remarks, I talked about industrial hitting 51% of the overall revenue mix.

So for the forward look, we updated our model in just a couple weeks back and we feel very comfortable that in a typical cycle trough, we are going be able to maintain a 70% floor beyond that we will continue to make the right trade-offs with opportunities to expand the top line and at some trade off on gross margin. So really the focus for the team is deliver the revenue growth and let that leverage drive all the way down through cash flow. So I wouldn't encourage folks to look for significant margin expansion. These are already pretty incredible numbers.

Stacy Rasgon - Bernstein Research - Analyst

But if the revenues kind of state this trajectory can at least the gross margin stay where they are, will they just fluctuate around, given like mix be the biggest driver from here or?

Prashanth Mahendra-Rajah - Executive Vice President, Finance and Chief Financial Officer

Yes, that's the right way to think about it.

Vincent Roche - Chief Executive Officer and Chair of the Board of Directors

Yes, Stacy. You're right. You look at our gross margins at this point, going forward, it's mixed utilization. And then we also have the $125 million of synergies to someone that will be on the cost goes sold side. As Prashanth laid out, we'll balance both gross margins, really to drive operating margins and free cash flow.

Stacy Rasgon - Bernstein Research - Analyst

Got it. That's helpful. Thank you, guys.

Vincent Roche - Chief Executive Officer and Chair of the Board of Directors

Thanks, Stacy.

Operator

And your next question is from Vivek Arya with Bank of America Securities.

Vivek Arya - Vivek Arya - Analyst

Thanks for taking my question. Vince, I think, Prashanth mentioned that industrial sales have grown over, I believe it's over 25% for the last six quarters and seem like they could be strong for another two or three quarters. I'm curious, how do you think about the normalized growth rate, and what macro indicators do you look at to say, this is, what ADIs industrial growth should be like? What are the early signals that you get to give you a sense whether you are over or under shipping end demand, because, from the outside, we look at all the turmoil in China, we look at all the turmoil in Europe, but then we look at this very strong industrial growth number and it gets harder to kind of reconcile, right, these two narratives. So give us a sense for, how do you feel about specifically your industrial business right now?

Vincent Roche - Chief Executive Officer and Chair of the Board of Directors

Yeah, thanks for that. So, first and foremost, it's a highly diversified industrial business that we've been diligently investing in from an R&D perspective, from a customer engagement perspective over the last - over the last decade or 12 years with a renewed focus. We've been gaining share very, very clearly. I think our portfolio particularly combined with the power activity as well from the LCC and Maxim acquisitions puts us an even better stead to capture more SAM essentially.

And to your question on growth, I would say that, we - during the Investor Day, we said that the new model is 7% to 10%. So I think industrial is going to be right in there somewhere over time. And we feel more confident now I think about our industrial growth than we've ever done, just given the strength of the portfolio, the customer engagements and so on.

And in terms of the signals we watch, obviously, we have a lot of conversations with our customers. I personally had strategic conversations with many of our largest industrial customers over the last quarter. And I think what they're all trying to convey to us is that things are different. We're moving into a new industrial cycle industry 4.0, 5.0. IoT are a - I beg your pardon, IT and OT, if you like colliding in a new partnership for the future driving a lot of new technology.

So that's one, obviously, one stream of input. We get the other signals we look at obviously are the PMIs, the machine tools, builders, indexes, and so on support. So, well, I think the greatest source of insight for us is our own knowledge of the end applications coupled to give our customers insights.

Vivek Arya - Vivek Arya - Analyst

Thank you, Vince.

Prashanth Mahendra-Rajah - Executive Vice President, Finance and Chief Financial Officer

Vivek, maybe I'll just add I think I said it in my remarks, but to be clear to everyone, our growth in industrial was broad. All applications hit record results in '21 and are on track to hit another record in '22.

Vivek Arya - Vivek Arya - Analyst

Okay, very helpful. Thanks, Prashanth.

Vincent Roche - Chief Executive Officer and Chair of the Board of Directors

Thanks, Vivek.

Operator

Your next question is from C.J. Muse with Evercore. Your line is open.

C.J. Muse - Evercore - Analyst

Yeah. Good morning. Thank you for taking the question. And I guess a comment on my side with these results, I'm surprised you didn't have a Big Papi and Tom Brady at your Analyst Day. So next time. So to my question, your results much better than your peers, your B2B business, I think up 11% versus your peers at mid-single digits, how do you think about the outperformance there, is a part of that your ability to source incremental supply, market share gains, right mix, would love to hear thoughts there. And then, as you think about the future going into the second half of this year and next, how does that inform your vision for continued outperformance? Thank you.

Prashanth Mahendra-Rajah - Executive Vice President, Finance and Chief Financial Officer

Yeah. C.J. maybe I'll start and then hand to - hand over Vince. So on the tactical side, we are working on getting additional capacity, both from our external partners, as well as the investments we're making internally. So you'll see that - you'll see that continue to play out over the course of the year, which is why I mentioned in the prepared remarks, look for us to continue to grow sequentially through this year and likely at least into the early part of next year. We've talked about - we've talked about pricing that has been a little bit incremental to the revenue growth. So that's certainly a piece of it. And the demand has just been very broad based. And again, I said it in remarks, but to be clear, we are seeing demand across all end markets and all geographies. It is very - it's very evenly spread and strength across all end applications. So we do feel to - to Vince's remarks here, we do feel very well positioned that our technology is really starting to hit the sweet spot across all of our - all of our customers. And then maybe I'll pass it to Vince to add some more.

Vincent Roche - Chief Executive Officer and Chair of the Board of Directors

Now, maybe just a little bit of color on the markets, C.J., I'll try and answer your question. So we've - with so many vectors of growth now, for example, in industrial, we're basically playing on all the high-end applications. And as I said, we've been tuning the R&D continuously the customer engagement. And if I just pick out, healthcare, as an example, that's beginning to get onto $1 billion run rate. Now it's been growing consistently for the last seven, eight years in the - at the double-digit level. Aerospace and defense, we see that actually, no matter what the cycle will be over the next few years, this is going to be an area of great strength for us. And in the communications area, great position in 5G. But interestingly, our wireline and data center business now is on a par with the wireless sector in terms of revenue contribution. So it's kind of half and half. So we see that again as a source of strength, but just also by a lot of the technologies that Maxim bring to that wireline area.

Automotive, we have a great story on the in-cabin experience with A2B, road noise cancellation, premium sound systems being more and more deployed. Electrification, we're on a $100 million a quarter run rate now, revenue run rate. And we have design-ins at virtually all the electric car companies at this point in time. So we see that on a trajectory to $1 billion-plus in the foreseeable future. So that's just some of the examples to complement what Prashanth has narrated as well in terms of the vectors of growth and prosperity for the company.

C.J. Muse - Evercore - Analyst

Very helpful.

Vincent Roche - Chief Executive Officer and Chair of the Board of Directors

Thanks, C.J.

Operator

Your next question is from Ambrish Srivastava from BMO. Your line is open.

Ambrish Srivastava - BMO - Analyst

Hi, good morning. Thank you very much. I had a question on the cost synergies, Prashanth. How should we be modeling these on a go-forward basis? You said exiting fiscal '23, but what's the breakout? And then kind of related to that is when we're talking about gross margin, I was a little bit surprised that you said the inflationary pressure would be abating as we go into - as we continue through this year. Did I catch that right? Because inflation, the headline numbers seem to be - they haven't - maybe they have peaked but definitely higher than where they were last year. So would love some color on that comment as well.

Vincent Roche - Chief Executive Officer and Chair of the Board of Directors

Yes. Thanks, Ambrish. Two good questions, and thanks for giving me the opportunity to clarify. So first, on synergies. We had talked, when we did the Maxim closed that we had some great learnings from LTC on how to get to synergies and that was to move fast and hard, and you're seeing us execute against that strategy. So we captured basically the entire $275 million that we originally committed to as we exited our second quarter. And that at Investor Day, we said we're raising that target to $400 million, and we'll hit that number coming out of - or as we exit 2023.

That first $275 million was a little more tilted towards cost of goods, and the following piece will sort of be balanced between cost of goods and opex. So as you look forward, that's how to think about the balance of that. To your question on the comments I made, thank you for giving me a chance to clarify. We have used our pricing opportunities to maintain gross margin. So to be clear, we're not looking at pricing as an opportunity to expand gross margin but really as a way to offset. So when I said abate inflation, I meant versus the historical inflation that we had experienced in 2021. It took us a little bit longer to get those pricing actions in place. So now we have neutralized them and you see that benefit in the current year. And of course, if we do continue to see price increases - sorry, cost increases in the coming quarters, expect us, like the rest of the industry, to respond by pushing those through.

Ambrish Srivastava - BMO - Analyst

So there's no artifact in the 74% that you reported this quarter for pricing? We should expect kind of that level on a go-forward basis, maybe bounce around based on mix and also the utilization rate?

Michael Lucarelli - Vice President of Investor Relations and FP&A

Ambrish, this is Mike. Yeah, as we had talked about earlier, going forward that 74% will bounce around, like you said, mixed utilization of the two drivers. And then as Prashanth outlined, that 125% does have a COGS element in it that will also help gross margins. But if you go forward 74%, plus/minus, I feel pretty good about that.

Vincent Roche - Chief Executive Officer and Chair of the Board of Directors

With the caveat, again, I want to make it clear for everyone. With the caveat that we are focused on growth, so where it makes sense for us to be a little more flexible to drive top line, we will do that. So I wouldn't want folks getting too laser-focused on modeling in mid-70s on the gross margin. We've given you a floor and we will give the management team the flexibility they need to drive the top line.

Ambrish Srivastava - BMO - Analyst

Right. You've been very consistent about that. Thank you.

Vincent Roche - Chief Executive Officer and Chair of the Board of Directors

Thanks, Ambrish.

Operator

Your next question is from Chris Danely with Citigroup. Your line is open.

Chris Danely - Citigroup - Analyst

Hey, thanks guys. So with all this talk on revenue growth, your forecasted sequential revenue growth for July is the slowest in a couple of years. Can you talk about why that's happening? And is that because of COVID shutdowns or something else? And then as part of that, with all this focus on increasing capacity, I would assume your capacity is growing faster than the 2% or 3% sequential revenue growth. So can we assume that the lead times are coming in this quarter as well?

Vincent Roche - Chief Executive Officer and Chair of the Board of Directors

Yeah. So Chris, the sequential growth is constrained by capacity. But we've indicated that we will see sequential growth through the year. So look for a more meaningful change as we get past the third quarter, which we've been saying for a while. So if you look back at prior comments, we've been very clear that we've ordered the tools and the equipment. We know our position in the queue. We know when those are coming in, and they go to revenue generation fairly quickly. So we are maintaining our outlook that we will exit the year at a much higher run rate than where we are now. And that is all driven by our ability to produce. And what was the second question?

Chris Danely - Citigroup - Analyst

Perfect. Thanks for the verification.

Vincent Roche - Chief Executive Officer and Chair of the Board of Directors

Yeah. Chris, I'll also add one thing. You're right, the sequential growth is, I'll call it, decelerating now. What happened in the first half of the year, we talked about, we added pricing and that added to the growth. We had volume and pricing in the first half of the year that's driving sequential. Pricing is really in the model now, now that the growth in the back half on a sequential basis is really driven by capacity and volume. And if you zoom out and don't look at sequential and look at year-over-year, we're growing our B2B business in our fiscal third quarter by over 20% year-over-year again. So it's a fantastic result, I think, and it shows the strength of this franchise.

Prashanth Mahendra-Rajah - Executive Vice President, Finance and Chief Financial Officer

Yeah. I think we can give everyone the data point that on a sequential basis, think of it as 50-50. The growth is coming from pricing versus units. So that falls into the baseline sequentially as we go forward, pricing falls into the baseline.

Vincent Roche - Chief Executive Officer and Chair of the Board of Directors

Thanks, Chris. Your next question is from William Stein with Truist Securities. Your line is open.

William Stein - Truist Securities - Analyst

Great. Thanks for taking my question, and I'll add my congratulations to the very strong revenue and profitability and the outlook as well. That was great. But despite all that good stuff, there's a few factors that investors are certainly concerned about potentially disrupting bookings and potentially revenue performance, of course, the war in Ukraine, the COVID shutdowns in China and raising rates. But there's also a concern maybe not as prominent, but - that we've picked up on, which is customers adjusting orders, potentially cancelling or pushing out because they're very challenged from a kitting perspective. You highlighted yourself that you're capacity constrained. Can you help us understand how those factors are affecting your business today and how you anticipate them playing out in your business over the next few quarters?

Vincent Roche - Chief Executive Officer and Chair of the Board of Directors

So I think first and foremost, cancellations on ADI are very, very low. They're very muted. Customers - we've been very equitable in terms of how we have moved our supply across the markets, across the geographies, across the customer sizes. And I think that still is in very, very good stead. So my sense is we have - because of the equitable distribution of our goods, so to speak, we've got a better, more true read on demand. And I think what we're shipping reflects what is true demand, I think better than most, I believe, based on feedback I'm getting from customers. So I think those are the facts, cancellations low, equitable distribution of goods. And we don't see any - our backlog is still, actually during the last quarter, increased so demand continues to remain strong.

Michael Lucarelli - Vice President of Investor Relations and FP&A

Just the numbers, well, the book-to-bill is above 1 in the second quarter, and that was, again, by all end markets and geographies. Because of that, the backlog continued to grow. You asked specifically about China. So real quickly, that's about 20% of our revenue. And the lockdowns had some impact on customer production, but it was really more severe around logistics and the supply chain related to the greater Shanghai area. Our China revenue was up quarter-over-quarter and year-over-year and no notable impacts to demand. Again, cancellations normal, and as I mentioned, book-to-bill above 1 for China. So when our guide reflects that most customers are operating at relatively normal levels and we consider this dynamic, so we think that at least for the third quarter, it's going to be a negligible impact.

Vincent Roche - Chief Executive Officer and Chair of the Board of Directors

Yes. Just add a little bit of color. Also, we have no internal manufacturing operations in China. And from a logistics standpoint as well, we have very, very modest operations also in China.

William Stein - Truist Securities - Analyst

Well, thank you.

Michael Lucarelli - Vice President of Investor Relations and FP&A

We'll go to our last question, please. Our last question is from Toshiya Hari with Goldman Sachs. Your line is open. Once again, Toshiya Hari, your line is now open.

Vincent Roche - Chief Executive Officer and Chair of the Board of Directors

Toshi, are you on? Toshi may be on mute. Do we have one more in the queue?

Michael Lucarelli - Vice President of Investor Relations and FP&A

Do we have one more in the queue?

Operator

Sure. Our next question is from Gary Mobley with Wells Fargo Securities. Your line is open.

Gary Mobley - Wells Fargo Securities - Analyst

Hey, guys. Thanks for taking in my question. I wanted to ask a follow-up question on backlog. I think you mentioned that based on the backlog and adding incremental supply, your expectation is for sequential revenue growth for at least maybe the next few quarters, maybe three, maybe four quarters. Wondering to what extent have you stress tested your backlog to see, I guess, under the most bearish of circumstances, how that may trend if perhaps we see further deterioration in the economic backdrop and whatnot?

Prashanth Mahendra-Rajah - Executive Vice President, Finance and Chief Financial Officer

Yeah. Gary, a fair question. The - as Vince mentioned, we look at a number of external indicators. So we are mindful of what's happening in the macro environment. But as you mentioned, the conversations that he has with our customers continue to support their need for our products and that we are attached to the right secular driver. So I do want to clarify, you had said sequential growth for the next three to four quarters. I can't see out that far, Gary. I feel good about the next two to three quarters sequential growth, but I'm not sure I want to go out further than that at this point.

Gary Mobley - Wells Fargo Securities - Analyst

All right. Thank you.

Michael Lucarelli - Vice President of Investor Relations and FP&A

Thanks, Gary. Thanks, everyone, for joining us this morning. A copy of the transcript will be available on our website. Thanks again for joining the call and your continued interest in Analog Devices.

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ANALOG DEVICES INC

Q2 2022

Earnings Transcript

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