Analog Devices, Inc.
Q1 2020 Earnings Call Transcript

Published: 19 Feb 2020

[Operator:]

Good morning, and welcome to the Analog Devices First Quarter and Fiscal Year 2020 Earnings Conference Call, which is being audio webcast via telephone and over the web. I'd now like to introduce your host for today's call, Mr. Michael Lucarelli, Senior Director of Investor Relations. Sir, the floor is yours.

[Michael Lucarelli:]

Thank you, Cheryl, and good morning everybody. Thanks for joining our first quarter and fiscal 2020 conference call. With me on the call today are ADI CEO, Vincent Roche; and ADI CFO, Prashanth Mahendra-Rajah. For anyone who missed the release, you can find it and relating financial schedules at investor.analog.com. Now on to the disclosures. The information we're about to discuss, including our objectives and outlook includes forward-looking statements. Actual results may differ materially from these forward-looking statements as a result of various factors, including those discussed in our earnings release and our most recent 10-Q. These forward-looking statements reflect our opinion as of the date of this call. We undertake no obligation to update these forward-looking statements in light of new information or future events.Our comments today about ADI's first quarter fiscal 2020 financial results and short-term outlook will also include non-GAAP financial measures, which exclude special items. The comparing results to historical performance, special items are also excluded from the 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 CEO, Vincent Roche. Vince?

[Vincent Roche:]

Thanks, Mike, and good morning to everybody. Well, our first quarter results were in line with our expectations as you will see. And importantly, we managed our operating costs and working capital effectively to position ourselves to deliver margin expansion in the quarters ahead.Before I discuss the quarterly highlights, I'd like to address the coronavirus outbreak. First and foremost, our top priority is the health and safety of those affected and of course, our employees. We're doing everything we can to provide our customers with the support they need to minimize disruption to their businesses. And while the situation remains fluid, we are monitoring it closely. Prashanth will expand on the financial implications in just a while.So now into the first quarter, revenues $1.3 billion, down versus the prior year, but in line with our expectations. Operating margin was approximately 37% at a time versus last year due to lower revenue and our decision to lower utilization. Adjusted earnings per share was $1.3, above the midpoints of guidance. Over the trailing 12 months, we generated approximately $2 billion of free cash flow equating to a 35% free cash flow margin. And this continues to places in the top 10% of the S&P 500.On our call last quarter we shared our priority for 2020, and I'd like to give you an update on our progress so far. Priority one is the efficient use of our capital. The first call in our capital is funding new product development activities. In the first quarter, we invested over $250 million in R&D with more than 90% of this spend targeting the most effective opportunities across our B2B markets. For example, an area of increased focus for ADI is our power franchise. Here we've been increasing R&D to enhance our strong position in the broad markets and to extend into new opportunities across areas like data center, automotive and 5G infrastructure. Our power design wind momentum remains strong. And we expect to double the OTC historical revenue growth rate in the years ahead of us. At the same time, we remain committed to delivering strong shareholder returns. In the first quarter, we returned over $300 million to shareholders. And we just announced a 15% increase to our quarterly dividend.Priority two is deepening customer centricity. As I’ve shared before, the combination of our broad product portfolio, domain expertise, and manufacturing capabilities sets ADI apart. We're always anticipating the technology needs of our customers and engaging with imparity in order to solve their toughest challenges. And I'd like to share just a few examples specific to our automotive segment with you now.Our HEV platform continues to gain traction in the cabin electronics ecosystem. By leveraging our platform portfolio, we're opening up new applications for our customers such as active noise cancellation. In the quarter Hyundai became the 14th auto manufacturer to incorporate to A2B technology. And together, we announced the industry's first all-digital road noise cancellation system. With the rise of active noise cancellation, we're creating stickier customer relationships due to the integration of our hardware and software capabilities, while increasing our sum per vehicle.There's also a level of intensity and urgency in audience moving towards electric powertrains, we were an early player in the market partnering with industry leaders to improve the efficiency of the battery and electric vehicles as our results, our BMS solutions, are delivering greater miles per charge and monitoring battery health more accurately. In the U.S. electric vehicle market, we're benefiting from near-term strength as customers ramp production. And new design wins across future models will help us to deliver on our long-term objective of growing BMS revenue at a double-digit rate.Priority three is capitalizing on secular trends to expand our addressable markets and drive diversified growth. We've previously discussed with you key secular trends across our company, such as 5G, electric vehicles, factory automation and data center.Now today, I'd like to spend some time on the space markets, perhaps a more obscure sub-segment of our industrial sector. Our space customers’ challenges are not just are on RF signal processing and power management, space solutions must also perform under extreme cosmic radiation and conditions of high temperatures. We solve these challenges through the combination of our comprehensive product portfolio and passive knowledge base built over many decades of serving these markets. While the space represents a couple of percent of ADI's total revenue today it commands stellar margins, and we see potential to double the business over the next five years.Now let me share a little more with you about why this sector is exciting to us. The space market is rapidly evolving. Over the last decade, unprecedented levels of capital have gravitated towards this vertical thereby increasing the number of private refunded space companies by 20 times. Therefore, new technologies and capabilities are emerging that are leading to new opportunities for ADI. This includes the advent of low Earth orbit or LEO communication satellites. These satellites are becoming the new frontier in space with forecasts suggesting that by 2020 over 20,000 will be revolver up from just hundreds today. To provide some context, LEO satellites differ from today's geostationary or GEO satellites. Technologically, they provide lower latency and higher bandwidth, which enable real time communication. Operationally, they continuously change their position relative to the earth and always stay connected with a given terminal for approximately 10 minutes.As a result, the number of terrestrial terminals that communicate with these satellites, whether they are on the ground or in the air, will grow into the millions with the proliferation of LEO satellites. To succeed in creating this network, both satellites and terminals must be capable of being steered. So this requires an exponential increase in channel count enabled through phased array antennas, an architecture that is used in 5G networks already today. And as you can imagine, more channels packed into smaller form factors is increasing thermal and power hurdles.To help solve the engineering challenges of creating this ubiquitous in all those and always-connected LEO network, our customers are increasingly turning to ADI, looking to us to not only be a supplier but indeed a key system architect. So we're engaging with customers early in their design process to develop end-to-end solutions from antenna to bits, combined with power capabilities to deliver the required performance and, of course, robustness.Our ability to provide a comprehensive portfolio of space-grade solutions across the entire analog spectrum from RF and signal chain to power is unique. And this cannot be completely replicated by any of our competitors, making ADI to go through supplier for traditional OEMs, as well as the next wave of disruptors.All told, we see the LEO communications satellite plan becoming at least four times the size of GEO over the next five years. And with LEO’s shorter refresh cycle compared to today's satellites, we expect our space business to deliver a steadier stream of revenue in the years ahead.In summary, space has the potential to be a meaningful growth driver and unlock value across other verticals as well. Once fully operational, these LEO networks will provide real-time, reliable high-speed connections globally ushering an opportunities from autonomous driving to telesurgery.So in closing, and speaking broadly about ADI, I believe demand for our solutions will be unprecedented as technological innovation underpinned by ubiquitous sensing, hyper-scale and edge computing, and pervasive connectivity continues to grow rapidly. And as I look ahead, I believe we're very well positioned to deliver sustainable, profitable growth, and indeed, the strong shareholder returns.So with that, I'll hand it over to Prashanth.

[Prashanth Mahendra-Rajah:]

Thank you, Vince. Let me add my welcome to our first quarter earnings call. My comments today with the exception of revenue and nonop expenses will be on an adjusted basis, which excludes special items outlined in today's press release.ADI delivered a solid first quarter. Revenue came in line with our outlook as we meaningfully reduced channel inventory. And through our disciplined spending, operating margin and EPS were above the midpoint of guidance. We also raised our quarterly dividend to $0.62, an increase of 15%, the high-end of our target range of 7% to 15%. The dividend is the cornerstone of our capital allocation policy, and this represents the 17th increase over the last 16 years. These consistent increases reflect our commitment to strong shareholder returns as well as our optimism about the long-term prospects for our business.Before getting into the income statement, let me first cover the end market. In line with our expectations, our first quarter B2B revenue declined 15% year-over-year as better-than-expected industrial demand was balanced by softer communications activity. Industrial, which represented 53% of revenue during the quarter, declined 7% year-over-year as we forecasted most applications within this highly-diversified business declined while aerospace and defense, once again, grew double-digits year-over-year. Communications, which represents 18% of revenue during the quarter, decreased 31% year-over-year, as wireless and wired both declined. While communications is an inherently lumpy market, our position has never been stronger or more balanced across the ecosystem. We are at the early stages of the global 5G rollout, which we continue to expect will be a multiyear tailwind. Our Auto business, which represented 16% of revenues during the quarter, declined 16% year-over-year due to weakness across all applications. As Vince highlighted, we remain confident in auto due to our strong pipeline of customer wins, especially in our infotainment platform and our market-leading BMS position. And lastly, Consumer, which represents 13% of revenue during the first quarter, declined 20% due to portable applications. As we said in our last earnings call, we expect 2020 to be the bottom for our Consumer segment.Now onto the P&L. Gross margin came in at 68.5%, up slightly sequentially, and down 180 basis points year-over-year, as favorable mix was offset by lower utilization. As a reminder, fab utilization was near trough levels this quarter in order to reduce our balance sheet and our channel inventories. OpEx in the quarter was $412 million, down 4% sequentially, and down 8% year-over-year. In light of the software revenue environment, we curtailed spending and have delivered sequential OpEx declines in each of the past five quarters. As a reminder, we plan to exit fiscal 2020 with $50 million of annualized savings across cost of goods sold and OpEx.Operating margins finished at approximately 37% above the guided midpoint. Nonop expenses were $47 million, down $3 million sequentially, and $9 million year-over-year, driven by lower interest expense. Our tax rate for the quarter was approximately 12%. All told, first quarter adjusted EPS came in above the midpoint of guide at $1.3.Now moving on to the balance sheet. As we planned, inventory was reduced by about $20 million or 4% sequentially. Despite this reduction, our inventory days increased to 133 due to the lower level of revenue. We call that our target for inventory days is 115 to 125. But during the process of closing two legacy LTC facilities, we do expect to carry an additional 5 to 10 days of bridge inventory to support our customers. We also reduce channel inventory by approximately $40 million in the fourth quarter, and plan to reduce channel inventory in the second quarter again, but to a lesser degree. CapEx in the quarter was $55 million, or about 4% of revenue, and we expect to end fiscal 2020 slightly below our 4% long-term target.On a trailing 12 month basis, free cash flow finished at $2 billion, or free cash flow margins of about 35%. Over this period, we've returned more than 100% of our free cash flow to shareholders through dividends and buybacks after debt repayments. We paid approximately $200 million in dividends and repurchased $160 million of our stock in the first quarter. We still plan to pay down between $300 million to $500 million of debt in fiscal 2020.Now I'll provide some context on our recent business trends and our current view on the coronavirus. In the first quarter, we saw signs of stabilization as we expected. Orders trended better throughout the quarter and have overall remain relatively resilient into the second quarter. However, unsurprisingly, we had begun to see weaker demand in China related to the extended Chinese New Year and ongoing business disruption. As such, our outlook assumes that China's demand for Industrial, Automotive and Consumer is minimal for all of February, before returning to a more normal level in the last two months of our second quarter. And we are assuming an impact on our Communications business due to the high likelihood of a delay in the 5G rollout. So our forecasting business dynamics in China is very difficult today. Our guidance reflects our best estimates.So looking ahead of Q2, revenue is expected to be $1.35 billion, plus or minus $50 million. This includes an approximately $70 million revenue reduction due to the near-term risks associated with the coronavirus. And as I said earlier, we expect to reduce channel inventory again, but to a much lesser degree than in the first quarter.At the midpoint of $1.35 billion, we expect B2B revenue in the aggregate to increase mid to high-single digits sequentially with growth across all of our B2B markets of Industrial, Automotive and Communications.Based on the midpoint of guidance, op margin is expected to be up sequentially to approximately 37.5%. We are planning for our tax rate to be between 10% and 12% for the quarter, and we are improving our fiscal 2020 outlook to between 11% and 13%.Based on these inputs, adjusted EPS is expected to be $1.10, plus or minus $0.08. While we are mindful of the uncertainty around this, I echo Vince's optimism, we are encouraged by near-term trend that point to a stabilization and improvement across end markets, and we are extremely confident in the long-term growth opportunities for ADI.Let me give it back to Mike now to start our Q&A.

[Michael Lucarelli:]

Thanks, Prashanth. Okay. Let's get to our Q&A session. Please limit yourself to one question after our initial response. We'll give you the opportunity for follow-up. Operator, can we have our first question please?

[Operator:]

[Operator Instructions] And our first question comes from Vivek Arya from Bank of America. Your line is open.

[Jamie Zakalik:]

This is Jamie on for Vivek. Thanks for letting us to ask a question. So similar to peers, you guys noticed some stabilizing and improving trends in end markets in the January quarter. But it seems like growth has actually decelerated across all the end markets. So I guess, are the improving trends more in February even with a lot of these virus headwinds? And is it specific to any end market or geography or is it in more broad-based?

[Prashanth Mahendra-Rajah:]

Yeah. So, Jamie, I think the first quarter was in line with what we expected. So there was deceleration going into the first quarter. Now, remember that in this quarter we under shipped the channel. And as I have said in my prepared comment, we under shipped by $40 million. So on a revenue [indiscernible] reg basis, PO ship in was $40 million below sell-through. As we go into the second quarter, orders were improving over the course of the first quarter. And we expect that to continue into the second quarter with this note that we made on disruption in China, where we believe some of this demand is going to get pushed out to future quarters. So I do think that our view here is that we've sort of bottomed out and we get better from here through subsequent quarters.

[Vincent Roche:]

Yeah. Maybe I can add a little bit of color as well from a market perspective on that. So, what we're seeing is, in spite of what looks like a delayed 5G deployment in China, in the second quarter, we're expecting growth actually quite good growth in our communications 5G sector as well as wire line. And that growth is becoming a little more broad-based. We're seeing, I would say, green shoots in the factory automation and process control side of things as well, which is a significant part of ADI's Industrial business, and also gathering strength in the ATE sector. And from an automotive standpoint, we're seeing particular strength in our business in America as well as Europe at this point in time.

[Michael Lucarelli:]

Given the long of that answer, we're kind of push to the next caller please, Cheryl.

[Operator:]

And our next question comes from Tore Svanberg from Stifel. Your line is open.

[Tore Svanberg:]

Vince, I was hoping you could elaborate a little bit more there on 5G. You said it's becoming a more broad-based business. Just trying to understand geographically where the growth is coming from, because obviously it's not coming from China near-term. So if you could elaborate, that would be great. Thanks.

[Vincent Roche:]

Well, I think, Tore, China has taken a pause. Asia is still, at this point in time, in terms of deployments today, Asia is by far the strongest in 5G. I think what we're seeing is the – probably, a faster roll-off in 4G than we had anticipated. 5G has taken a bit of a pause in China, but is set based and what we see in terms of demand is set for a ramp during the second quarter. And also I pointed out that wireline for ADI in general, whether it's data center, whether it's Metro or long haul networks is doing quite well. So yes, we come into the second quarter. Our book-to-bill has been -- is well above one. And that gives us the confidence in the growing strength of that business through the second quarter here.

[Michael Lucarelli:]

Thanks Tore. Do you have a follow-up?

[Tore Svanberg:]

Yeah. Just a quick one. Prashanth, you did a good job lowering channel inventory. It sounds like you're going to lower a bit more again this quarter. Could you maybe give us some targets either by weeks or what dollar amount that you trying to lower than by?

[Prashanth Mahendra-Rajah:]

Well, I think, Tore, we had mentioned in our first quarter or fourth quarter call that our goal was to get back to our target range by the end of the second quarter. It may take us a little bit longer now given that we didn't include the impact of the coronavirus in the top line. So we're still heading towards the same channel inventory target that we’ve had before. But with bit of a softer top line, I think, it might actually be end up third quarter before we're back in range.

[Operator:]

Thank you. Our next question comes from Toshiya Hari from Goldman Sachs. Your line is open.

[Toshiya Hari:]

Your Automotive business was down 16% in the quarter, which was in line with your guidance, but relative to peers a little worse on a year-over-year basis. Vince and Prashanth, you guys talked about your optimism around from the design-win activities in BMS and infotainment. But in the near-term, what's driving kind of the double-digit decline in your Automotive business? Is that mostly channel inventory reduction? Or are you losing share? I guess more importantly, how are you guys thinking about kind of the through-cycle growth rate for your Automotive business over the next couple of years?

[Prashanth Mahendra-Rajah:]

Yeah. Well, look, I -- we have been very, very clear. The two growth drivers for ADI in the automotive sector are the infotainment area, A2B active noise cancellation, audio signal processing in general. And of course, BMS has been, over the last couple of years, a double-digit growth driver for ADI. I think in the quarter just past BMS, which has a strong root in China, has suffered as a result of the virus. And – but, when we look into the second quarter, we expect our second quarter has better trends in North America and Europe. So we're expecting modest growth in the second quarter. The headwind for ADI has really been the safety sector where our 24-gigahertz radar technology is declining, probably at a rate a little faster than I had expected. And also in the area of MEMS, more the kind of the passive safety MEMS where we withdrew investments three or four years ago. So, I think, we'll begin to bottom-out, I think, on those headwinds. Specific to safety, we have a new safety modality in 77 gigahertz, which is, by all accounts, very, very exciting for our customers. We will see the bottoming, I think, of the MEMS and the 24 gigahertz radar decline. So my sense is in the areas we've picked powertrain, infotainment, we're very, very well-positioned to grow those sectors over the next two, three, four years.

[Operator:]

Thank you. And our next question comes from Ambrish Srivastava from BMO. Your line is open.

[Ambrish Srivastava:]

Thank you very much. Prashanth, I had a question on the actual weeks of inventory, and I might have missed it, but did you give an actual number? I think you were 8.5 weeks in the prior quarter.

[Prashanth Mahendra-Rajah:]

We did not give a number, Ambrish. What I mentioned, if you took the channel inventory down to $40 million, but if you do the math, we're still going to be above our target range because the revenue -- the numerator has moved, but the denominator has also shrunk. So on a ratio standpoint, the weeks is still high, but we did take a big chunk out, and we're going to take more out in Q2 as we mentioned.

[Michael Lucarelli:]

Is there a follow-up, Ambrish?

[Ambrish Srivastava:]

I did. Vince, maybe for you. In the two areas as real quick on Industrials, what's the right way to think about given what's going on in China and broader. How to think about return to growth in the Industrials business? You guys outperformed last year, but what -- how should we think about year-over-year growth returning? And then, comps, we always ask you about why less. It’s slightly a different question. How are you guys positioned in wireline versus if you look back at years ago? And then what gets you excited about the design wins in -- that should be ramping out in wireline. Thank you.

[Vincent Roche:]

Thanks, Ambrish. Let me try and address the Industrial question first. So, we are seeing our aerospace and defense business continue to grow at double-digit rates annually. We are seeing, as I said a little earlier on the factory automation side of things, I said Asia is on a -- I'd say a solid improvement in its demand pattern. I think inventory hangover has largely been taken out of the equation in the industrial sector. So, I think, when we look at the impact of the virus in China, we're not expecting really anything in the industrial sector in terms of shipments there for the month of February. But, all that said, we've a very solid book-to-bill in the industrial sector. And we will get, I think a decent increase in our top-line and industrial during the second quarter. On the wireline side of things, our gain there is really two pieces. We have a very strong leadership position in optical control systems for data centers. So all of the things, for example, will use our technology in their data centers for control of the optical signal chain. And also the cable market, we have a good position there in infrastructure systems. So wireline business has been growing high-single digits now for several years. And I don't see any decline in that. I think that'll be a decent growth driver for ADI. It runs into the region of $400 million annually in terms of sales at the present time. So I view that very much, Ambrish, as a tailwind for the company.

[Prashanth Mahendra-Rajah:]

Yes. Let me also add on the Industrial side, we did take down general inventory meaningfully. A lot of that relates to Industrial. And if you look at Industrial, kind of zoom out, we look at it on a trailing 12-month basis, we only down low-single digit. It was a pretty good performance in a tough macro backdrop, and that goes to the diversity of that business. With that Cheryl, we’ll go to next question.

[Operator:]

Thank you. Our next question comes from Mitch Steves from RBC Capital Markets.

[Mitch Steves:]

I just wanted to clarify couple things. I think you guys did a very good job now kind of talking about your capital allocation, but what I'm having hard time understanding is kind of the margin mix here. I realized that space and satellites probably higher margin, I'm guessing at 80% to 90% gross margin. You guys are actually coming down a bit in the gross margin line. Can you maybe talk us through what the gross margin profile should look like in the first half and the second half? And then how that would flow through the operating margin line as well?

[Vincent Roche:]

So I guess a little bit of background right. Our model is 70% gross margin for a long-term model. And in good times, we were operating at 72%, in more challenging times, like now, we're down in the high 60s, so through the cycle it’s 70%. As we move forward from here, we see two things that are going to be impacting margins, both utilization and mix. So Q1 represented the trough level of our utilization expectations for the year. So a fair amount of under absorption at our internal manufacturing facilities. That gets better from here on and that will be tailwind to margins. And also as some of the questions that were asked, Vince mentioned the strength in Industrial, we expect Industrials to continue to be growing as we move forward. And Industrial, in general, is one of our highest margin businesses. So that will also provide tailwind. So I would expect that you can see sequential improvement in gross margins through the balance of this year, likely getting back to our model margins in the second half, maybe towards the end of the end of the year.

[Mitch Steves:]

And then I just have one follow-up just in terms of the seasonality for the business. I think maybe you should probably be thinking a little bit of a more conservative view in April just because it sounds like China is going to open up March 1. But when I looked at the July quarter, going from April to July, should that be, I guess, above the seasonal given that April was depressed from all the macro items are going on?

[Vincent Roche:]

So the guide for our second quarter included a $70 million adjustment that we made at the top for the impact of the coronavirus. And the math that we use to arrive at that is we essentially zeroed out February in China for Industrial and Auto and Consumer. And then we also made an adjustment for Communications being pushed of -- the department of 5G being pushed out of it just because of the labor challenges that are going on there. We expect that to begin unwinding as -- in the subsequent months and certainly be back to normal in the third quarter. Could it be above normal? That's certainly a possibility depends on the timing of how that $70 million comes back. It's our current view that that is purely a timing shift that that is not locked demand. But as to when that falls back in, it's hard to say. But the order activity certainly suggests that it's not going away.

[Operator:]

Our next question comes from Stacy Rasgon from Bernstein Research. Your line is open.

[Stacy Rasgon:]

Thanks for taking my questions. I wanted to view in first on comp, so it sounds like you're pushing it out. Your prior guidance for comp last year was to grow year-over-year and it feels like you're backing away from that, but the trajectory in the second half on the old guidance was for very strong sequential growth kind of every quarter going forward. How should we be thinking about the trajectory of comp in the second half, I guess, given the pump in Q2 versus the profile that was – that you had in mind three months ago when you gave guidance? Do you still expect to see a similar ramp maybe just off a lower base?

[Prashanth Mahendra-Rajah:]

Yeah. So, just a few things, Stacy. For the first quarter, a little bit lower than we expected mainly due to the 5G pause that started in the second half of '19. Moving into the second quarter, orders have begun to come back in very much as we expected, and our book-to-bill is above one. So that's supporting a strong sequential increase in second quarter for both 5G, but also as Vince mentioned, we're seeing some good strength in wireline had been reported by a number of peers as well. The sequential increase is below our initial expectations because of the -- a lot of that was related to 5G timing in China. So I think everything is moving a little bit to the right here. So it's hard for us to say at this point whether the timing of that recovery is still going to put us up year-on-year, but I think we'll have to see how quickly this demand recovers and whether the installations happen as it caught up in the year or not? But we feel very good that this is really a dislocation of demand versus actual loss or destruction.

[Vincent Roche:]

I'll tell you one other comment in that, Stacy. Our optimism about what's happening in America related to 5G has strengthened over the past quarter as well. So yes, we have the disruption in China. It's really a delay of demand rather than disruption. But my own sense is that we probably see more activity in the back end of the year in the U.S. relating to 5G.

[Michael Lucarelli:]

Is there a follow-up, Stacy?

[Stacy Rasgon:]

I do. Thank you. So it sounds like also, even though we have the delay because of coronavirus in China that the order patterns still seem to be very strong. How do we think about the strength of those Chinese orders in relation to potential increases in sanctions that we have been hearing about? Do you feel like there's any sort of scramble on the part of Chinese customers to get out in front of those sanctions? What do you see in terms of customer behavior in relation to the regulatory?

[Vincent Roche:]

Yeah. I think first off, when you look at the geopolitical machinations, it's actually very hard to figure out what's going on. So, but, I think with our business in general, we have many thousands of customers in China, many thousands of product skews. And we see ongoing demand that there are obviously areas where we are restricted, particularly in 5G. But I think the rest of our business right now is in a kind of normalized markets and regulatory situations. So the demand we're seeing is despite the disruption here because of the virus, the demand in China is actually quite strong across the board otherwise.

[Stacy Rasgon:]

Let me rephrase the question. If, all of a sudden, like the diminimus threshold gets dropped from 25% to 10%, and the foreign direct products will gets strengthened and they put more stuff on the controllers, does that impact how you guys view the trajectory in China as we go through the year? Would you have to reevaluate what you can ship and what you can’t?

[Prashanth Mahendra-Rajah:]

Well, yes, we would have to reevaluate. But remember that we have adjusted one large communications customer down from a traditional mid-single to low-single digit as percentage of revenue. So that is kind of -- that's the limit of our exposure depending on what happens to that particular customer.

[Vincent Roche:]

Yeah, I think it very much depends on the scope of what happens. So far everything we've seen is relating to one specific area of communication. So, unkown, Stacy, but we'll see. Time will tell.

[Operator:]

And our next question comes from Craig Hettenbach from Morgan Stanley.

[Craig Hettenbach:]

I just wanted to follow-on the comments about the opportunity to double Linear's growth in the coming years. And Prashanth if you can talk about, I know, there is some gross margin levers as you consolidate manufacturing and just kind of how you dealing on that in terms of the growth profiles versus kind of margins for linear in the next couple of years?

[Prashanth Mahendra-Rajah:]

Sure. So I'll take the margin side of it, and then in terms of doubling the growth, I’ll let Vince comment. On the margin side of it, we have talked about the focus we've got on shutting down two facilities. We've taken -- we've made announcements on those. We've actually been able to accelerate some of the savings for the – for one of the factory closure, so we're going to start seeing some of that benefit in cost of goods sale at the end of this year. But the balance of that $100 million, we see feathering in over 2021. And as we've stated in the Q4 earnings call, our intention is to let – to kind of let all that come through be the bottom line. So we are not looking to redeploy that cost of good things. So you should see some lift in our gross margins on an ongoing basis as we exit 2020 and through 2021. In terms of kind of the progress we're making to double that linear growth rate, let me hand that up to Vince.

[Vincent Roche:]

Yes, so I think we're making good progress Craig, in kind of equalize the value of the kind of legacy ADI mixed signals technology value in a given application with power. So we're looking for equivalent, for every dollar of mixed signal we expect to get a dollar power. And that's what the market opportunity available is. I can tell you that our pipeline for the LTC portfolio and, specifically power is up about 40% actually year-over-year, and we're moving into production down the automotive sector, the communication wireless sector, wired, we're in early volume production as well. So we expect to see those areas run in terms of meaningful impact on the top lines during 2021. And there are many, many, new stockists in the industrial area that we're working on. So that will just take a little longer given the slower uptake in terms of turning design-ins to revenue. But I think a lot like Hittite, we feel -- we went through this process with Hittite. We've doubled the size of that company -- that franchise over the last five years. And I think we're on a very good track right now with LTE to achieving 200, 300 basis points of top line growth based on the strength of the portfolio, and the activity at the customer level that we're seeing.

[Michael Lucarelli:]

Thanks, Craig. We go to the next caller.

[Operator:]

Our next question comes from Harlan Sur from JPMorgan. Your line is open.

[Harlan Sur:]

Good morning. Good to see the fundamentals starting to improve here. A&D grew greater than 20% last year, defense budget was approved beginning of this year. It's strong up 4% versus last year. And you guys expect continued double-digit year-over-year growth here this year. And the – so is most of the strength coming from the defense segment? Or are there also programs in the commercial aerospace SATCOM sector that are starting to fire as well?

[Vincent Roche:]

Yeah. As I said in the prepared remarks, obviously, defense budgets are in our favor in terms of buying technology and deploying it, so we're in good shape there. And, yeah, we're seeing a strong double-digit growth in the space area as well. And that's relatively -- we've had a good position there. But if you like the explosion in the launch of LEO satellites and GEO satellites is really increasing demand for the company. And we're looking at in these applications many thousands of dollars of content per satellite kind of thing. So we're very optimistic about that. But it's a combination of both. Both parts of that business are really growing well.

[Prashanth Mahendra-Rajah:]

Harlan, I would say, remember, think about defense as when DoD gives the money to the primes and the prime start deploying it, this is going into a design decisions that were made many years ago. So we are enjoying the flow of that larger budget into the primes and then to us for decisions that were made some time ago. We still have quite a bit of great design activity that has yet to be funded. So that starts to come. On the aerospace side, its holding as well as it can be expected given the environment that's growing on there. And then in the space, as Vince mentioned, space is really in front of us. That growth is in front of us. So while ADEF has been growing at a nice clip and continued to, we feel even more optimistic about what's in front of us coming both from space and future design-win activity that happened for the defense business.

[Michael Lucarelli:]

Thanks, Harlan. We’ll go to our last caller please.

[Operator:]

And our last question comes from William Stein from SunTrust. Your line is open.

[William Stein:]

Thanks for taking my question. Two of them really, first, I'm hoping you can provide some update or commentary as to the competitive situation and maybe the legal competitive situation with an FPGA supplier in high performance converters, maybe competitive trends as to design win traction relative to that vendor?

[Vincent Roche:]

Well, broadly speaking in terms of competition, we've outgrown our closest competitors for the last three years. And so, we're clearly gaining share across the board in Communications and Industrials, in particular. So I think competitively we're in good shape. I think pricing is very, very stable as well. So, I think overall legacy is strong, our design pipeline is strong, and we're excited about the new R&D programs as well that are coming to fruition for the company. In relation to the litigation with, as you said, a large FPGA company, we will give you -- as new information emerges, we'll be transparent with you, and we'll communicate with you. But at this point, all I can say is that we're confident that this matter is going through the court and be successfully resolved. And we are defending our IP very aggressively, and we believe we have a very, very strong case, so that's where it is. It's within the court, but we're very optimistic with how things are going.

[Michael Lucarelli:]

You said you have a follow-up, Will?

[William Stein:]

Yeah, appreciate that. Just on the Covid impact. It sounds like what you're saying is that you're assuming certain orders are zero for February given where February '19. I assume that's actually what you're seeing in the order book. Is there any anticipation for weakness later in the quarter? And also any supply disruption that you're noticing at all? Thank you.

[Prashanth Mahendra-Rajah:]

So on the orders, as I mentioned in the prepared remarks, it is very hard to kind of sigh the activity of what's going on in China. So when we arrived at our 70, we wanted to give the investor and analysts’ community what assumptions are we using knowing that these are very dynamic. So for our assumptions, we've taken our China activity to zero in February and pushed out a little bit of 5G. On the supply chain side, we're not seeing much disruption at this standpoint. We had some of our back-end suppliers early on. We're struggling just – we’re getting some labor into -- to run their activity. But that's also been resolved as time has settled out here. So from our standpoint, our supply chain and we just revalidated this with you guys this morning our supply chain we feel good about.

[William Stein:]

That’s great. Thank you.

[Michael Lucarelli:]

Thanks Will. I'll also add, I think it might be helpful, given your question, kind of given our outlook of B2B what we think is market is going to do, because it seems a little confusion out there of how we think the markets are going to do. We think each market grow sequentially. We said, in total B2B will be up mid- to high-single digits. Our rank order those three. I think comps is little better than that. Industry does in line with the overall outlook, and auto does a little bit worse. So that's going to help you think of how the corona is impacting our business. And with that, thank you everyone for joining us. A copy of the transcript will be available on our website. And all of our reconciliations and information can also be found on the quarterly results section of our website. Thanks again for joining us, and the continued interest in Analog Devices.

[Operator:]

And this concludes today's Analog Devices conference call. You may now disconnect.