Analog Devices, Inc.
Q4 2017 Earnings Call Transcript

Published: 21 Nov 2017

[Operator:]

Good morning, and welcome to the Analog Devices’ Fourth Quarter and Fiscal Year 2017 Earnings Conference Call, which is being audio webcast via telephone and over the Web. I’d like to now introduce your host for today’s call, Mr. Ali Husain, Treasurer and Head of Investor Relations. Sir, the floor is yours.

[Ali Husain:]

Okay, good morning everybody. Thank you, Jennifer. Good morning everybody. Thanks for joining our conference call. You can find our press release and relating financial schedules at their usual place, at investor.analog.com. With me on the call today are ADI’s CEO, Vincent Roche; ADI’s CFO, Prashanth Mahendra-Rajah; and Mike Lucarelli from Investor Relations. First, let's get through our disclosures. Note that 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 and we undertake no obligation to update these forward-looking statements in light of new information or future events. Today’s commentary about ADI’s fourth quarter and fiscal ’17 financial results will be detailed further in our 10-K, which we expect to file over the next few days. In addition, note that ADI’s fourth quarter and fiscal ’17 financial results and short term outlook will include non-GAAP financial measures when comparing our results to our historical performance. Special items are also excluded from the prior quarter and year-over-year results. Available 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 in our Web schedules, which we’ve posted under the quarterly results section at investor.analog.com. Our Web schedules also include a historical view of what the combined ADI and Linear Tech would have looked like by end markets, by quarter for the last three years. And lastly, please note that ADI’s first quarter of fiscal ’18 includes an additional week, so fiscal 1Q ’18 will be a 14-week quarter. And as expected, include one normal week of revenue expense. Okay, so with that, I'll turn it over to ADI’s CEO, Vincent Roche. With the exception of fourth quarter revenue, Vince’s comments about our financial results are on a non-GAAP basis and exclude special items outlined in today’s release and in our Web schedules. Okay Vince, it’s all yours.

[Vincent Roche:]

Thank you, Ali and very good morning everyone. I’d like to firstly welcome Prashant to ADI. This is, as you know, Prashant’s first quarter as our CFO and I am really delighted to have him join ADI. Turning to the quarter. The fourth quarter of fiscal 2017 was another very successful quarter for ADI. And I am pleased to share our results with you this morning. Revenue in the fourth quarter totaled $1.54 billion and was above the midpoint of guidance as the communications and consumer markets led our sequential growth, while the industrial and automotive markets were stable through the prior quarter. Our strong overall revenue performance coupled with disciplined operational execution expanded growth and operating margins and drove diluted earnings per share to $1.45, which was above the high end of our guidance. Now to provide you with a historical perspective, over the last five years, ADI has doubled its revenue base to $5.2 billion, expanded operating margins by over 900 basis points to approximately 40% and nearly tripled free cash flow generation on a combined Company basis to $1.9 billion or 34% of sales, which is within the top 5% of all S&P 500 companies. From a strategic perspective, 2017 was a Watershed year as we completed the acquisition of LTC, further deepening and widening our competitive moat, expanding our capabilities and high value signal processing and power management applications, and giving ADI the ability to more completely serve the ever expanding needs of our more than 100,000 customers. ADI is now able to solve customer problems from sensor to cloud, from DC to 100 gigahertz and from nanowatts to kilowatts with a leading market position in all product segments. Fiscal 2017 was also marked by strong execution across our portfolio of products and customers. For example, in the industrial markets, which represented 46% of revenue in fiscal '17, our battery formation and test equipment solutions experienced both cyclical and secular growth as we gained additional dollar content in our customer systems and added new customers in this expanding market, which is forecasted to grow 5 times by 2022. The factory automation sector also grew strongly during the year as customers made both Brownfield and Greenfield upgrades to manufacturing equipment. Here ADI's technology solutions are enabling value creation for our customers by helping reduce [technical difficulty] time, boost productivity and make manufacturing more flexible and configurable. In healthcare applications, our optical sensor based solutions also grew strongly over the prior year, led by vital signs monitoring and imaging applications. In the automotive market, which represented of 15% of revenue in fiscal 2017, we made excellent progress on the promise of autonomous driving with new innovations and radar technology, where our solutions provides superior range and resolution capability beyond anything available in the market today. And in automotive infotainment applications, we hit an important milestone for our A to B Audio Bus solution, surpassing 1 million units shipped in the year across platforms of many automotive OEMs including Ford. The communications market represented 18% of revenue in fiscal '17. Within this market, we've experienced a 10-fold revenue increase over the past four years for our software defined radio solutions, which have become the market leader from macro sales massive MIMO and small cell. The consumer market represented 21% of revenue for the year and also grew strongly led by portable applications. As we often say, look favors the prepared minds, and we've been preparing and investing for this moment for many, many decades. And across our business, we are creating, capturing and retaining value by leveraging our culture of innovation to solve our customers’ biggest and most pressing challenges. Building on a very strong 2017, we believe we can continue to drive long-term profitable growth by investing at the cutting edge to grow our core franchises and by extending our reach with our customers. So with that, I'd like to turn the call over to ADI's new CFO, Prashant. In his short-time here, Prashant has hit the ground running, providing me and the organization with his keen strategic insights. And I'm very confident that with his operational focus and financial discipline, we will increase shareholder value further.

[Prashanth Mahendra-Rajah:]

Thank you, Vince. Good morning everyone. And let me add my welcome to our fourth quarter earnings call. I'm very excited to be joining Analog Devices and to be joining Vince’s leadership team. This is a Company with tremendous legacy of innovation, and I look forward to helping to drive the business and deliver against our long-term financial model. In my eight weeks here, I've been deeply impressed with the quality of our ADI's technology, the dedication of our employees and the depth of our customer relationships. I have met many of you by phone already and I look forward to getting on the road and meeting you in-person. Now getting to our results. As Vince mentioned, the fourth quarter of 2017 was an excellent period across the multiple dimensions and caps off a very strong year. As I walk through the P&L with the exception of revenue and non-op expenses, my comments will be on a non-GAAP or adjusted basis, which excludes special items outlined in today's press release. Revenue for the fourth quarter was $1.54 billion, up 6% sequentially and above our guidance midpoint. Gross margins of 70.9% were 40 basis points higher than our guidance primarily on higher utilization and cost synergy capture. Inventory was stable at 108 days in the quarter and on a dollar basis, inventory increased to $31 million sequentially as we ramped production to match strong demand. Distribution channel inventory of seven weeks was stable to the prior quarter as well, on both the weeks and the dollars basis. Operating expenses in the fourth quarter were $435 million or 28% of revenue, which improved operating margin to 42.6%. Non-operating expenses in the fourth quarter were $67 million, and we should see this decline by $2 million to $3 million per quarter for fiscal '18. Our fourth quarter non-GAAP tax rate of 9% included a full-year true up to bring the 2017 rate to 9.6%. But as we look to 2018, we expect the 12% tax rate, which is an improvement versus our previously issued guidance of 15%. EPS for the fourth quarter was $1.45, bringing the full-year to $4.72, up $1.65 from the prior fiscal year. Free cash flow generation was very solid in the quarter at $630 million with an associated free cash flow margin of 41%. And during the quarter, we paid down $350 million of debt, which has helped reduce our net-debt-to-EBITDA ratio to 2.6, down from the 2.9 in the prior quarter. Capital additions in the fourth quarter were $65 million and we expect capital additions in fiscal 2018 to continue to run at our model of approximately 4% of sales. During the quarter, we paid $167 million in dividends with an associated quarterly cash dividend of $0.45, representing an annual dividend payment of $1.80 per share. All-in a good quarter to wrap-up a solid year. Let us now turn to our outlook and expectations for the first quarter of fiscal '18, which with the exception of revenue, are also on a non-GAAP basis. We are planning for revenue in the 14 week first quarter to be in the range of $1.44 billion to $1.54 billion. We expect a full weeks revenue benefit from this 14th week as it falls in the last week in the month of January. Adjusting for the additional week and at the midpoint of guidance, Q1 revenue is expected to decrease sequentially. On this same basis, we expect ADI’s B2B markets of industrial, automotive and communications, in aggregate, to decrease in the mid-single digit sequentially in this seasonally slower first quarter, but to be up over the prior year led by the industrial end market. Given that our revenue guidance by end market is not perfectly correlated with our actual results, this will also be the last quarter in which we provide our revenue outlook by end market. Of course, we will continue to guide you to an overall revenue range. We are planning for gross margins to remain relatively stable sequentially and to be in the range of 70.5% to 71%. Operating expenses are estimated to be in the range of $440 million to $450 million and include an additional week's worth of activity related to the 14 week quarter. On a 13 week basis, operating expenses are expected to decrease in the mid single digit sequentially. Based on these inputs, we expect operating margins in the first quarter of 2018 to be in the range of approximately 40% to 42% and for diluted earnings per share, excluding special items, to be in the range of a $1.20 to a $1.36. So to wrap it up, this was a terrific quarter performance and wraps up a very strong year of revenue growth, margin expansion, EPS growth and free cash flow generation. Looking ahead, we're encouraged by a number of positive indicators across our business, including the strong secular growth drivers, a robust opportunity pipeline and access to customers at an unprecedented level, which combined with our strong free cash flow and commitment to deleveraging, will continue to drive value for our shareholders. Now, before we move to the Q&A, I have an additional announcement. To help continue the successful integration of Linear Tech, I am delighted to announce that Ali Husain has accepted the position of CFO for ADI's power division supporting Steve Pietkiewicz and will be relocating with his family to Sunny, California. Vince and I would like to take this opportunity to thank Ali for the tremendous work he has done with the investment community and we look forward to working with him in this new role to drive even greater shareholder value in the future. Moving forward, Mike Lukareli who many of you already know from his work with Ali over the past couple of years, will be your main point of contact in IR. I have enjoyed getting to know Mike over the past few weeks as someone who is both energetic and knowledgeable. I'm sure you'll find Mike to be a great resource for your investment research on ADI. And so with that, I'll turn it over to Ali for our Q&A session.

[Ali Husain:]

Great, thanks Prashanth. It’s been a privilege working with the investment community and I look forward to this new challenge. So let's get to the Q&A session. Please limit yourself to one question. After we provide you with our initial response, we'll give you an opportunity for a follow up question. So operator let's get to our first question.

[Operator:]

[Operator Instructions] Our first question comes from John Pitzer with Credit Suisse.

[John Pitzer:]

My first question, Vince, is just around industrial year-over-year growth. I think clearly one of the investor concerns out there is that that part of your business has been growing greater than 20% for several quarters consecutively. And I think there's some concerns around sustainability. Last quarter, you highlighted some one-offs that helped to drive some of the strength, including things like ATE. Were there one-offs in the October quarter? And I guess more importantly as you look out over the next several quarters, how would you expect year-over-year growth rate to trend and what sort of the more normalized growth rate we should suspect as being sustainable?

[Vincent Roche:]

I think, let me start with the last part of the question first about sustainable growth rates. If you look back over the last five years of our business, we've had a growth rate in 2017 that was well beyond 20% in the industrial sector. But actually when you aggregate over the five years, the growth rate was around 5%. And I think that is a sustainable number and the way to think about the long-term growth trajectory for the industrial business. So then looking into '18 how do we view things? Well, I think for sure the strong GDP environment bodes well for the industrial business, number one. I think also we're seeing good growth drivers. I've had the benefit of speaking to many executives at many of our industrial customers over the last several months, the last few quarters. And what I can tell you is that the activity in building out the industrial IoT; I talked in the prepared remarks about the Brownfield upgrade in America; for example, the Greenfield those outs in China. All these things I think are good secular growth drivers that have many-many years of legs to them, particularly I would say in China. And added to that John we're seeing for example the emergence of these rechargeable batteries everywhere in cars obviously everybody knows about smartphones and so on so forth, but the formation and text of those battery systems is quite a great performance challenge and an area where we see a lot of opportunity to bring precision technologies to market. So I think you've got to be skeptical to some extent. I think there are it's -- are those growth rates sustainable? Yes I think on a 5% level they are but my sense is heading into '18, we should be able to hold the gains. I guess, the only caution retailer there is one in the industrial market is the world of ATE. But again, there what we're seeing is for example the shift from hard disk drive to solid state memories to building out of these giga memory factories and giga factories in general to support consumer goods. So I think when you put everything together across instrumentation, aerospace and defense factory automation and instrumentation, in general, I think we're in for a good cycle rate now.

[John Pitzer:]

And then maybe as I my follow-on, just on the consumer side, it was a lot stronger than expected in the October quarter. Wondering if you can give us some color on what was driving the strength? And I know Prashanth in your prepared comments you mentioned you want to stay away from giving guidance on an ongoing basis by end market. But during the Analyst Day this year, you kind of gave fairly specific guidance for all of fiscal ‘18 on consumer. And as we think about your different content in flagship phones and how that might look into to the January quarter. Is there any help that you can give us on what we should expect to see at a consumer at least relative to seasonality going into January?

[Prashanth Mahendra-Rajah:]

Well, our consumer business in the quarter was ahead of expectation. It was at the high end of our expectation. And it was purely driven by portable applications. And as we signaled at the Analyst Day, we’re expecting our consumer business to be down on 2018, largely on the back of a weaker portable market, portable business for ADI. And you're already starting to see that weakness in the guidance that we're now providing. So I think at the midpoint of guidance, if you take ‘18 the prediction for ‘18, we expect consumer to be down meaningfully over 2017.

[John Pitzer:]

Perfect, thanks guys. Congratulations on the results.

[Vincent Roche:]

John, I would only add that if you take the guidance we've given you, you adjust for the 13 quarter, which is the first calculation. And then back out the B2B guidance we've given you, you should be able to impute the consumer guidance and you'll come up with a pretty meaningful number, which is the trend that we've been indicating for the past several quarters is starting to materialize.

[Operator:]

Our next question comes from Craig Hettenbach with Morgan Stanley.

[Craig Hettenbach:]

So I had a question on the automotive market. You highlighted 1 million units of A2B. Can you just talk about the breadth of that? I know you mentioned Ford. But just kind of design, breadth of design, and how you see the trajectory in A2B?

[Vincent Roche:]

Craig, virtually all the OEMs across the globe have adopted A2B. And we just basically got our steam going in 2017 largely in the U.S. and to some extent Europe. So we're at the very, very early stages, we're not at the need of curve yet, so to speak. So I expect hockey stick in the A2B market over the next three years and it will ramp in '18 and '19. And I think we'll be at some significant sustainable level of revenue in the 2020 timeframe. So we're in the ramp phase, but I think it's very meaningful that we've already shipped a million units into production models at this point.

[Craig Hettenbach:]

And then as my follow up for Prashanth, what are the key areas as you step into the CFO role there. Key areas of focus for you and opportunities you see going forward?

[Prashanth Mahendra:]

So certainly, primary goal is going to be ensuring that we deliver against the financial model that was communicated over this summer. That means we need to grow our revenue, convert that revenue into high profit dollars and then deliver that profit at cash flow growth to pay down our debt. I would say equally important will be to work collectively with the three division presidents to ensure the successful integration of LTC, to achieve both the revenue and the cost synergies that we're underpinning the deal rationale. And then maybe last, I think, Vince has mentioned in prior calls that I've been chartered with working with the division leaders to really uncover and capture opportunities for track value, help drive shareholder value. That include areas that I've already begin working with the organization on such as pricing.

[Operator:]

Our next question is from William Stein with SunTrust.

[William Stein:]

I'm hoping you can characterize lead times and book-to-bill in the quarter that's being reported and compare them to the prior quarter?

[Prashanth Mahendra:]

Yes, I can help you with that. So as I mentioned, activity remains fairly stable. So, on a book-to-bill basis at the enterprise level just hare under 1 as we head into the first quarter. And then if you back out consumer, some slight expansion versus that. However, as I mentioned, the channel still looks very stable and at around seven weeks and equivalent on a dollar basis. So we're heading into the holiday season but from where we stand today, given the somewhat limited visibility that this industry has, so things look to be stable.

[William Stein:]

One other follow-up if I can. I'm hoping you can offer some competitive commentary on the converter market in light of one of the field programmable Gatorade company, is highlighting this product they call an RFSoC that they indicate is taking share in the converter market, maybe you can comment on that.

[Prashanth Mahendra:]

Look as is the dynamic in the business world, good markets are always going to attract competition. And I think competition in the converter market in general has been really consolidating over the last five or seven years. But we've got a five decade history of building high performance analog solutions for our customers across the board in areas like wireless infrastructure, wired infrastructure and other important areas like aerospace and defense, civil aviation and so on. And what I can tell you for sure is that, as the OEMs deal with ever increasing technology complexity, our customers in the area of these communication systems, in particular, where a lot of the very-very high speed data converter products are used they need a very broad array of microwave of RF, mixed signal technology and of course power technologies. And it's really about smartly partitioning their solutions for performance, for power efficiency, for footprint, and last but not least cost. And we have a multi-decade history of not only delivering on all aspects of those performance dimensions across the board, but also we've been delivering a broad suite an array of converter products for many-many years on time with very high quality. And last but not least, great support at the application and system level. So there'll always be competition. But our portfolio is unmatched in our industry irrespective of whatever configuration a customer is using. So there'll always be competition but it's our job to stay ahead right on the cutting edge of what's possible.

[Operator:]

Our next question is from C.J. Muse with Evercore.

[C.J. Muse:]

As you think about the extra week in January, do you expect that to be equally apportioned across all segments or do you think one or two will be better than others? And I guess as a follow up to that, how do think about normal seasonality heading into the April quarter?

[Vincent Roche:]

C.J. that extra week is just a calendar consequence of how the ADI fiscal is run. So it comes around every five to six years. It will be equivalent across all industries. And since it falls in the month of January, I would not expect anything out of the ordinary for that. But I would remind everyone that as you build your models going forward into Q2 that you do want to adjust your sequential growth rates to reflect that you’re moving from a 14 week into a 13 week quarter.

[C.J. Muse:]

And then I guess as my follow-up, I guess to kind of follow-on John's question around the sustainability of industrial strength year-on-year. Can you walk through as you look back on '17, how much of the strength was a reset to GDP versus replenishment in the distribution channel versus rising silicon content. How do you think about those three factors in terms of 20 plus percent growth?

[Vincent Roche:]

In terms of raising silicon content, I think there is no question that there is more sensing more measuring being applied to factory automation and process control machines. So we benefit from that. It’s something at doesn’t get talked about as much is the automation of labor in China and that's going to be a multiyear build out. And many of our European and Japanese customers, in particular, are benefiting from that build out. But that will be -- that's part of the China 2025 initiative. So that's very significant and will be for a long time to come. And I think look there is certainly an anxiety around supplier there. So clearly, a certain amount of the demand is driven by anxiety. But I would say when you look across our channel, you look across our customer base inventories are up somewhat. Our inventories are up a little but we are building these on the basis of what we believe to be real demand. So I think this is very much a demand driven cycle and I think when you look at the inventories across the board, things are pretty good balanced at the moment.

[Operator:]

Our next question is from Stacy Rasgon with Bernstein Research.

[Stacy Rasgon:]

First on the guidance next quarter, the B2B corrected for the extra week, down mid-single digit, seems to be a bit worse than I would consider normal. Is there anything specific across your three businesses, I guess, relative to what we had ordinarily see as we go into Q1 that’s driving that maybe a little worse than normal seasonality?

[Vincent Roche:]

Well, I would say Stacy that when you look at that on a year-over-year basis, even guiding B2B as we did, is still pretty healthy growth year-on-year. So that gets you almost to high-single digits low double-digits or year-on-year [multiple speakers]…

[Stacy Rasgon:]

But industrials up like [5%] year-over-year. So I men what's going on…

[Vincent Roche:]

Stacy, in the first quarter if you back into the guidance industrial will be up in the mid-teens and the B2B markets, as Prashanth mentioned, are forecasted to be up in the high-single digits over the prior year in the first quarter to 13 week basis. So into a quarter that is typically lower on seasonality basis, particularly for industrial given that you have the holiday period for the factories.

[Stacy Rasgon:]

So I mean you always have the holiday period in that quarter?

[Vincent Roche:]

Correct. I'm just saying on a sequential basis.

[Prashanth Mahendra:]

Stacy, we’re headed into a seasonally weaker quarter. We read the order flows and we provide you with the guidance range that we think is reasonable. You can chose take a midpoint of that range it creates a high-single digit road in the B2B market for the prior year. That's the best we can tell you. The other I’d point out is we did beat the midpoint of the guidance in the prior year by 260 basis points. So we're certainly coming off of a pretty strong result. And I think the year-over-year growth rate is really what we would look to in terms of how we think that are running the business at least excess of our business. So that's helpful, did you have a follow up?

[Stacy Rasgon:]

I wanted to ask about automotive. So it's flattish year-over-year and sequentially, but also year-over-year on a combined basis with Linear, which maybe is bit of odds before we're seeing some period but also maybe sounds like a little bit odd on what you're seeing on your A2B market and the growth in there. So can you talk a little bit about the auto dynamics, in particular, on a year-over-year basis when does that start to grow and what's been going on over the last year?

[Vincent Roche:]

So if you look at the legacy ADI business during '17, that part of our automotive business grew in the high-single digits where we had some headwind was specifically because of the continuing battery management weakness in the LTC portfolio. So that whole BMS thing that whole market is highly concentrated in terms of customers and programs. So really what we're seeing is still working off of the inventories in China, but the pipeline that we have in BMS designs is good. And so we see that business recovering during '18 as several of these new customer programs start to come online. So I think by the end of '18, we'll be on a good growth track in that business, but that is the primary dampening effect, if you like, on our automotive business. And as we said at the Analyst Day, we expect this business to grow at two to three times SAR, and that's still our commitment.

[Operator:]

Our next question is from Mark Lipacis with Jefferies.

[Mark Lipacis:]

If you look at the operating margins, they've expanded over by about 450 basis points over the last year, 950 bps over the last three years. And I was wondering is there a physical limit to the margin profile here? Is there any reason why they would not continue to drift up overtime?

[Prashanth Mahendra-Rajah:]

Mark, I would probably take you back to the financial model. And that's where we have modeled out how this business is going to -- expected to operate over the next several years. So we have some favorability movement now. We've talked about utilization rates I think we’ve talked about bringing in synergies little earlier than possible. But I would say that the way to think about it is to really hold us to that model so that's the standard we hold ourselves to.

[Mark Lipacis:]

And a follow up, if I may. If you look at previous industries that have consolidated, you do see upward bias on or better pricing environment, the Analog Industry has been consolidating. You guys have been an important driver of that. Can you describe -- and I know that you have mentioned pricing as one area of focus as you head into this opportunity. Can you describe what you have been seeing on the pricing environment over the years? Are you noticing changes? Thank you.

[Prashanth Mahendra-Rajah:]

Mark, I'm going to let Vince take that. Since he has a longer perspective on pricing and the trends that we're seeing?

[Vincent Roche:]

I think it's true to say that certainly consolidation has helped to stabilize prices across the industry. We're also seeing stabilization, partly because of the environment in which we're working but also because we're paying a lot more attention to getting -- understanding where there is elasticity and just basically holding on to the value that we generate better. So I think it’s a trend and we're certainly seeing stabilizing trends across our business over the last two or three years and I believe that stability will continue.

[Ali Husain:]

And Mark, I would only add from my personal observations is there's a broad section of the ADI portfolio that is very sticky and we need to ensure that we take advantage of that to ensure that we're getting fair value for the technology that we bring to our customers and that could represent some pricing opportunities.

[Operator:]

Our next question is from Tore Svanberg with Stifel.

[Tore Svanberg:]

My first question is on communication, so it's starting to grow nicely year over year again. I was just hoping you could add a little bit more color on what's driving that especially in relation to topics like 4.5G, 5G, optical and so on?

[Vincent Roche:]

So the communications business, as you know, is driven by two primary sectors. We've seen wireless infrastructure particularly strong it was up over the prior quarter. And driven by demand in developing regions like India for example but also in more developed markets like North America and China. We've seen both macro and smaller cell strength. And I'll give you a little more color in terms of technology in a second before -- after I make a comment on the wire line side of things. So it's well known that the wire line business, particularly the optical part of that, has shown weakness in China over the past year. So that's been the damper there. I think the wireless sector is going to see some good growth in the coming three to five years and I'll give you a little bit of color on that. As I see it, there is good activity still on 4G, heavy activity on 4.5G and 5G is in trials right now. But I think the boundaries between 4.5G and 5G are blurring to some extent, both of them are going to be based on massive MIMO. The indications are that that market is going to start to ramp in the latter part of 2018 into 2019, and going to peak to 2020. But as I said, we're seeing for example, activity where customers, our existing customers, are targeting at extending life of 4G systems. So there's activity in upgrading 4G, introducing 4.5G and getting 5G into play. So as I said, I think with all the demands for mobile data, we're still working hard on the classical problems of integration, design agility, power consumption and with our LTC, the acquisition of LTC we have a very strong power portfolio. So we're in a better and better position as a company to take advantage of these trends across the board. So whatever the configuration that customers use in 4G, 4.5G, 5G, ADI is very well prepared to satisfy our customer's needs.

[Tore Svanberg:]

From my follow-up for Prashanth, so you talked about utilization being up sequentially. Could you talk about where you stand on utilization today? And maybe more certain, in general where you are on in-house versus outside outsourcing at this point, especially given some of the fiber capacity that's out there at the wafer level?

[Prashanth Mahendra-Rajah:]

So I think your first question is utilization levels. So Q4 was a significant improvement for us in utilization. We don’t share a specific utilization percentage rates but it's fair to say that we were extremely busy internally in our fabs. And on the balance between now that we have the LTC operation in consolidated, we’re about 50-50 split between what we do in-house and what we give to third party or our channel partners.

[Operator:]

Our final question comes from Ambrish Srivastava with BMO.

[Gabriel Ho:]

This is Gabriel Ho calling in for Ambrish. Thanks for filling me in. So I am just looking at the core ADI businesses up 14% year-over-year and then your linear is up 5%. So what is driving the differences in year-to-year performance and also going forward how should we think about maybe to business to come work as you integrate the two businesses?

[Prashanth Mahendra-Rajah:]

So I would say a few things. First, LTC’s industrial business grew double-digit year-over-year, so that' very much in line with how the peers are doing. The automotive business, Vince, has already spoken to the inventory unwind and what's happening there. So overall, we're comfortable with where LTC is. I think, historically, an investor pain point for LTC has been, their focus on managing the business for gross margins versus a balanced revenue growth and that is part of what the integration process is driving and bringing them into ADI’s mindset about profitable growth to deliver the EBIT margins and the free cash flow. So as we look forward, I think that's very much into what we look to merge with the organization is to bring that top line focus into LTC, which for some of the organization hasn’t been as strong as an ADI.

[Gabriel Ho:]

And as a follow-up, I think now that the two businesses are combined, I think setting the 13-14 week quarter aside. So how should we think about in general the seasonality of your business for each quarter on a quarterly basis, going forward?

[Prashanth Mahendra-Rajah:]

I think the way to think about it is that the ADI and Linear Tech B2B markets actually behaved quite similarly on a seasonal basis. What I would encourage you to do is we placed a schedule on our website that tracks the end market revenue by quarter for the combined companies. And so just that you can go back and calculate what you think seasonality would be, because going forward, it's our sense that these two businesses certainly in the B2B markets track actually pretty similarly. So I hope that was helpful. Thank you again for joining us this morning for the call. A copy of this transcript will be available on our website. And all the reconciliations and additional information can be found on the quarterly result section of our Investor Relations site at investor.analog.com. So with that, thank you for joining us and have a happy Thanksgiving everybody.

[Operator:]

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