Analog Devices Inc (ADI) — Q4 2015 Earnings Call Transcript

All right, great. Thanks, Jennifer, and it feels good to say good morning everyone. Thank you for joining ADI's Fourth Quarter and Fiscal 2015 Earnings Conference Call. You can find our press release and related financial schedules on our investor page at investor.analog.com. As usual, this morning, I'm joined by ADI's CEO, Vince Roche; and ADI's CFO, Dave Zinsner. The agenda for this morning is as follows. First, we'll provide a brief overview of our fourth quarter and fiscal '15 results, and then we'll provide our current thinking and our outlook for the first quarter of 2016, and finally, Vince will capstone the prepared remarks, following which we'll open up the lines for Q&A. So before we start, let's get through the important disclosures we have to make every quarter. Please note 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-K. 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. Our comments today will also include non-GAAP financial measures, which we have reconciled to their most directly comparable GAAP financial measures in today's earnings release, which we have posted on our IR page at investor.analog.com. So let's get started. As you've likely seen from the press release, ADI had another very strong quarter. Revenue in the fourth quarter totaled $979 million, increasing 13% sequentially and 20% year-over-year. These results were above the high end of our guidance range, primarily due to strength in Portable Consumer Devices, and to a lesser extent, from some recovery in the wireless communications infrastructure market. For our just completed fiscal 2015, revenue totaled $3.4 billion, with Industrial Applications representing the largest portion at $1.5 billion or 44% of sales. The balance of revenue for the year was about evenly distributed across Consumer, Communications and Automotive applications. So during the fourth quarter, continued strength in Consumer Portable Devices resulted in $317 million of Consumer revenue, which was a sequential increase of 53%. Here, our precision technology platforms are being leveraged to deliver highly innovative user experiences and are driving very strong ROI for ADI's R&D investments. Revenue from Communications Infrastructure customers represented 16% of revenue, an increase of 12% sequentially in the fourth quarter, which was ahead of expectations. Wireline applications decreased sequentially while the combination of inventory replenishment and improving wireless CapEx spend drove our strong wireless infrastructure sequential revenue performance, as customers continued to deploy our highly innovative micro AF and RF solutions. Now despite this near-term rebound, wireless base station deployments are well below prior peaks and I'd say the same is true for ADI's wireless infrastructure sales. During the fourth quarter, our broad and highly diversified industrial end market decreased 4% sequentially, which was in line with seasonal patterns. All of the industrial subsegments within the industrial business declined sequentially, with the exception of Aerospace and Defense, which was stable to the prior quarter. And as you know, the industrial market is our most diverse customer base. It spans many different subsegments. It requires our highest performance technology, as you well know. It also supports very long life cycles and earns above corporate average gross margins. During the fourth quarter, our automotive business had 14% of sales, performed in line with expectations and was stable to the prior quarter. While near-term demand, we believe, is being impacted by lower-than-anticipated sales of premium vehicles in China, premium automotive suppliers continue to incorporate ADI's high performance technologies and applications such as radar-based Advanced Driver Assistance Systems and powertrain efficiency systems, which grew 33% and 10%, respectively, during the fiscal year '15. Automotive revenue for the year totaled $526 million, growing at a 9% revenue CAGR over the past 5 years, which is in fact 3x the rate of vehicle unit growth over this period. So in total, ADI's fiscal '15 revenue increased 20% from the prior year and totaled $3.4 billion. So now I'd like to turn the call over to Dave for details of our financial performance in the fourth quarter and in fiscal '15. With the exception of revenue and other expense, Dave's comments in fourth quarter and fiscal '15 P&L line items, free cash flow and free cash flow margin will exclude special items, which in the aggregate totaled $243 million for the quarter and $335 million, respectively, for the year. When comparing our fourth quarter and full year performance to our historical performance, special items are also excluded from prior quarter and year-over-year results, and reconciliations of these non-GAAP measures to their comparable GAAP measures are included on Schedule E and Schedule F in today's earnings release. So with that, Dave, I'll turn it over to you.

Thanks, Ali. Good morning, everyone, and thank you for joining us. The fourth quarter was once again a very strong and profitable quarter for ADI, and we set records for quarterly revenue, earnings per share and cash flow generation. Revenue this quarter increased to a record $979 million, and diluted earnings per share was $1.03, with both results above the high end of our guidance. Gross margins this quarter were 65.7%, which was in line with our guidance, and down 40 basis points from the prior quarter primarily due to mix. Days of inventory in the fourth quarter decreased to 114 days from the prior quarter's 128 days primarily on higher revenue. And dollars of inventory decreased $12 million over the prior quarter. Weeks of inventory and distribution were approximately 7.5 weeks, which was consistent with the prior quarter. Total end customer orders decreased in the fourth quarter as compared to the third, which is quite typical in advance of a seasonally slow first quarter and our book-to-bill was below 1. Operating expenses in the fourth quarter increased 6% sequentially, lagging well behind the 13% sequential increase in revenue as we continued to manage operating costs very tightly, allowing us to gain more operating leverage in our model. As a percent of sales, operating expenses in the fourth quarter declined over 200 basis points compared to the prior quarter, and declined over 300 basis points compared to the same period a year ago. Operating profits before tax increased to $351 million or 35.9% of sales, which is 170 basis points higher compared to the prior quarter and 270 basis points higher than the same quarter in the prior year. Other expense in the fourth quarter was approximately $4 million and represented the net interest expense on our debt. Our annual tax rate was lower than the rate we had anticipated at the end of our third quarter. As a result, we trued up our tax rate in the fourth quarter of fiscal 2015, which had the effect of increasing the fourth quarter EPS by $0.10 per share. Even when excluding the positive impact from the tax adjustment, diluted earnings per share grew 21% sequentially on the 13% increase in revenue, and was again above the high end of our guidance. Cash flow in the fourth quarter was very strong. Excluding a special payment associated with the conversion of our Irish pension plan, ADI generated $422 million or 43% of sales in operating cash flow, and CapEx was $46 million, resulting in free cash flow of $376 million or 38% of revenue. Fiscal year '15 capital spending was $154 million, and our plan for 2016 is for capital spending to be between $140 million and $160 million. At the end of the fourth quarter, our cash and short-term investment balance was $3 billion, with approximately $700 million available domestically. We had approximately $870 million in debt outstanding, which resulted in a net cash position of $2.1 billion. During the quarter, we returned $237 million to our shareholders in the form of dividends and share repurchases, which included higher share buyback activity of $112 million, as our buyback program responded to the volatility in our stock price. On November 23, 2015, our Board of Directors declared a cash dividend of $0.40 per outstanding share of common stock. This dividend will be paid on December 15 to all shareholders of record at the close of business on December 4. Now let me take a moment to talk about our performance in 2015. Revenues of $3.4 billion increased 20% over the prior year, and non-GAAP diluted earnings per share increased 33% to $3.17. Our cash flow generation was strong during the year. Excluding the previously mentioned Irish pension plan, operating cash flows were 33% of sales or over $1 billion, and free cash flow was 29% of sales or $978 million for the year. During the year, we returned $718 million to shareholders in dividends and share repurchases. We also increased our dividend by 8% in fiscal 2015, which was our 12th dividend increase in the last 11 years. All told, ADI had a very good fourth quarter and fiscal 2015. Our financial model converted top line growth into very strong earnings growth, and we continued to generate strong cash flows, while enhancing shareholder returns. So now to our outlook for the first quarter, which with the exception of revenue expectations, is on a non-GAAP basis, and excludes special items that are outlined in today's release. Our current expectations for the first quarter of 2016 is for revenue to be in the range of $805 million to $855 million, which would represent a sequential revenue decline of approximately 18% to 13%. It is important to note that excluding consumer, ADI revenues at the midpoint of this range are expected to decline sequentially at a mid-single-digit rate, which is in line with seasonal trends. The most significant sequential revenue decrease is expected to be in our consumer business, which is seasonally down in the first quarter, but will likely exhibit more pronounced seasonality after a very strong fourth quarter in which it grew 53% sequentially. In the industrial and automotive markets, we also believe that seasonal trends will largely prevail. Our communications infrastructure business is expected to remain relatively stable to fourth quarter levels, ahead of seasonal patterns on a continuation of the modest, but steady recovery in this market. The midpoint of our guidance range represents an increase of 8% year-over-year, and would mark the 9th consecutive quarter of year-over-year revenue increases for ADI, which would be quite a good achievement. Given our plan for lower sequential revenue, and as is typical in our first fiscal quarter, we are reducing production levels in the first quarter to approximately 60% from their current mid-70% level. As a result, we expect first quarter 2016 gross margins to be approximately 64.5%. By remaining disciplined on our production levels, we believe inventories will be well-positioned to support strong leverage once we resume sequential revenue growth. We expect operating expenses in the first quarter to be between $274 million and $279 million, which would represent a sequential decline of approximately 6%. We're planning for our tax rate to be approximately 14% in the first quarter, which is also our planned non-GAAP tax rate for fiscal 2016. In total, excluding special items, we expect diluted earnings per share in the first quarter to be between $0.65 and $0.73. At the midpoint of this range, diluted earnings per share is expected to grow 10% year-over-year, and this would represent the 11th consecutive quarter of year-over-year earnings per share growth for ADI, which would also be a very good result. We believe that our financial results are a good proof point that our strategy to focus on sustainable innovation across diverse applications and markets is working. And with that, I'll turn it over to Vince.

Thank you, Dave, and good morning, everyone. As Dave and Ali have highlighted, fiscal '15 was a very good year for ADI in terms of our financial performance. Our strategy, which emphasizes technology innovation and platform reuse across a diversity of applications, proved itself once again. Thus, even though the uncertain macro economy impacted industrial and automotive, and cyclical headwinds reduced communications infrastructure sales, these were more than offset by significant uptake of our signal processing technology in portable consumer devices. It was also an excellent year in terms of key accomplishments. In 2015, we successfully integrated Hittite and expanded available opportunities that we believe will deliver strong revenue synergies starting in 2017. Our integration teams and processes are finely tuned and have successfully achieved our 2015 cost synergy targets, which are expected to accelerate further in 2016. During the year, we continued to align our investments to critical strategic priorities, streamlining our management structure, while making investments to support our future growth. But as we take stock at the end of this fiscal year, I think it's important to look at our past performance over a longer period and provide investors some context on where we have come from and where we want to take our company. Over the last 3 years, despite an uneven macroeconomic backdrop, we have grown our revenue at an 8% annualized growth rate, and we have converted this top line growth into 14% diluted earnings per share growth. We've also been committed to returning cash to our investors. Over the last 3 years, we have grown our dividend at a 10% annualized rate while returning $2 billion to shareholders in dividends and share buybacks. And our annualized TSR over this period is 16%, which is in fact higher than the S&P 500 return over this period. As Dave mentioned, ADI's FY '15 diluted earnings per share were $3.17, and it is our goal to increase our non-GAAP earnings per share to up to $5 by fiscal 2020. And I think this is also an opportune time to point out that as we stand today, we are in fact ahead of the schedule in reaching this goal. We've also invested and continued to invest in future growth opportunities. Over the past 3 years, we've invested over $4 billion in future growth initiatives through R&D, M&A and capital additions. These are significant investments that we believe have been made at the right time in our company's history, and hold us in good stead for the coming opportunities that we believe will drive our future growth. Over our first 50 years, we have created a tremendous market share position in the foundational technologies that form virtual bridges between the physical and digital worlds. When customers need to reliably sense, measure, interpret and connect physical, chemical and biological phenomena to the computational domain, ADI has become their go-to supplier. It is our view that as the world becomes increasingly connected and machines become more autonomous, the demand for more and more virtual bridges is quite likely to increase, and this trend clearly plays to our core capabilities. In our terminology, we believe that the information and communications technology sector has entered its third wave. The first 2 waves were dominated by big iron, personal computing, mobility and connectivity. Various monikers are being applied to the third wave, such as the Internet of Things, Industrial 4.0 and so on. Whatever it's called, it's going to be about the pervasive use of artificial sensory and computing power for people and machines to see, to hear, to feel and so on throughout the physical space. As this third wave begins to take shape, it is creating growth opportunities for ADI that we expect will be beyond those achieved in the prior 2 waves. ADI's 50 years of signal processing leadership is at the center of this third wave. With the combination of the cloud and big data, we can enable a real-time understanding of what's going on in our world, so that we can act, react and predict in high-value applications in areas such as healthcare, industrial and automotive applications for example. In fact, existing and new customers are inviting ADI to help them to build even more virtual bridges to enable them to unlock the latent value, and create potential new revenue streams. For example, many of our industrial customers, who in the past, may have worked with us to control the most valuable engines and industrial machines are today looking to massively instrument those very same machines, and capture the value created by the data they generate. The value of the information generated, in fact, has the potential to become even greater than the value of the actual thing it is connected to, and this is very exciting for our customers, and in turn, it's also very exciting for us here at ADI. We are the acknowledged market leader in converters and amplifiers, 2 of the most critical technologies that bridge the physical and digital worlds. And we've also focused significant technical talent over many years on the development of ultralow power sensors and microcontrollers that are optimized for reliable, power efficient IoT solutions. Equally as important, our recent acquisition of Hittite means that ADI also possesses the full range of connectivity solutions necessary to transmit data to the cloud for analysis of trends and patterns, and then, back to the node to be acted upon. We've made steady progress this year in applying our silicon technology and algorithm heritage and strengths in deep domain and applications knowledge of the physical edge to create complete sensor to cloud solutions that are efficient, secure and reliable. This creates the possibility for ADI to not only create but also to capture additional value as we move more deeply into the information spectrum. We will continue to build momentum in these novel growth applications in the years ahead, while ensuring that we continue to strengthen our technologies and customer engagements in our core business. At ADI, we're very excited about applying our expertise to create solutions that solve the most important problems, leading to smarter cities, smarter buildings and factories, as well as transforming healthcare, and ultimately, people's lives. Now these are just some of the myriad applications with which we are helping our customers. Our customers are increasingly involving ADI early in their innovation conversations, and leveraging our capabilities to architect solutions to these very tough challenges. As the third wave takes root, we expect that growth from these high-performance solutions will drive future revenue and profit growth for ADI. So before I finish, I would just like to reiterate our outspoken strategic objectives. Firstly, we believe that innovation drives business success. We focus on sizable markets that value the performance we deliver in high-value areas at the intersection of the physical and digital worlds. Secondly, we believe in the diversity of markets, applications and customers. We place many modest new product bets in carefully chosen applications, and engage directly with the customers that represent a very large part of our served available market. Diversity ensures sustainability and resilience, and this has been proven by our ability to successfully navigate the extraordinary transitions in the semiconductor industry over the past 50 years. Thirdly, innovation and diversity enable ADI to build wide and sustainable economic moats that enhance shareholder value, and of course, this is all made possible by the talent, the ingenuity and passion of our global workforce, who continuously raise the standards and technology, customer engagement, supply chain and myriad other areas in a business as complex as ours. As the markets we serve move closer to ADI, I firmly believe our best days lay ahead of us. Thank you.

Great. Thanks, Vince. For those interested in learning more about ADI and the IoT space, we recently webcast a 45-minute presentation that goes into this topic in much greater detail. You can find all that information on our IR page. Now, let's quickly go over how we will handle the Q&A session. With that, operator, let's start the Q&A.

Dave, just historically, April has been one of your better periods in the year. I think, on average, probably up mid to high single digits, but now that consumer is such a more significant portion of the business, how do you think about seasonality in the April period?

Thanks, Romit. I think you're right in that, obviously, when we are more concentrated in industrial, we would have seen a much bigger ramp seasonally in the second quarter, which we expect to see that seasonality in the second quarter for industrial, but consumer now is a larger portion of our revenue. It's a bit of a wildcard. I think that quarter is generally seasonally down a little bit. Obviously, we don't have any visibility into the quarter yet, but that would mute a little bit the sequential increase that you would typically see in the second quarter. But as you know, this is a semiconductor business, and you never really know how things will pan out until you're really up on top of that quarter and can make a better determination.

So look, what happened in October and January, a little more revenue volatility than historical at ADI. So I guess to continue on Romit's question, how do we think about seasonality in 2016? And with that $980 million quarterly revenue bogey, what gives you confidence you guys can exceed $980 million in either the July or the October quarter in 2016? Maybe just talk about just visibility on the consumer front.

Yes, we will have a larger consumer business. Typically, the second half of the year performs much better than the first half on a fiscal year basis for us, as this period usually coincides with new product launches and Christmas builds. This will definitely alter the seasonality for the overall company. I believe that the usual seasonality for ADI will show relatively similar sequential increases each quarter for various reasons. The second quarter will likely focus more on industrial aspects, while the third and fourth quarters will probably shift towards consumer-related factors. What was your other question, Chris? I missed it.

Just talk about visibility on the consumer front. How do you feel about maintaining market share there in the second half of the year? Will this exceed $980 million in revenue?

Well, again, we have real confidence in revenue when we actually have orders. We have orders usually out about through the following quarter. So it's difficult for me to say what's going to happen over the next few quarters. But I would say our position with all of our large customers is very strong, and we expect to have a strong position with all of those customers out for the distant future.

I guess another question on the consumer side. If you look at the revenue ramp over the last several quarters, the vast majority of that's been driven by force touch. You guys are a relatively new supplier for a new application that the customer feels is important enough that they actually highlighted in kind of their advertising, and we know there's been some yield issues on the module away from you. And if we kind of try to get back into your sort of revenue coming from force touch and try to equate that to a unit number for your customer, it does appear that you're overshipping. And so Dave, I was wondering if you could help us understand, when you look at the January quarter, do you think you are overshipping to your customer right now? And when you look at the guidance for consumer, in the January quarter, do you get most of that back in January, so you feel more comfortable that you're not overshipping the demand right now?

Let me begin by noting that we typically do not discuss specific products or individual customers, as our clients prefer to maintain their privacy regarding market activities and applications. However, I will focus on our consumer business. The latter half of this year showed significant growth, which was not solely driven by one product or one customer. In our 10-K report, we mentioned a particular customer who contributed 13% of our annual revenue, highlighting their unique success. Nonetheless, various factors positively impacted our consumer business during the year's second half. It's important to consider that a substantial increase, like the one we experienced in the fourth quarter, often leads to an expected sequential decline in the first quarter. This suggests the likelihood of inventory accumulation during the fourth quarter, stemming from customers' specific supply chain management strategies. This behavior is fairly standard and not unusual for our customers. The decline in the first quarter helps to address that inventory buildup. The timeline for this adjustment with a consumer business of our scale, particularly one focused on portable products, may differ from our historical experiences. However, I anticipate a rebound in the third and fourth quarters, leading to strong performance. Ultimately, this context will allow everyone to make connections back to end consumption patterns.

Dave, on the gross margin outlook, with the sequential decrease, can you just frame up some of the gives and takes? Because it would seem like mix would be a tailwind to gross margin, but volume looks like a headwind. What was utilization in the quarter and where do you think it is from the outlook? And what is your ability to control the inventory mean for the gross margin trajectory as we look out to the April quarter and beyond?

Yes. I think I mentioned that utilization was in...

Utilization in the quarter was about 70%.

Yes, it's 70%. But we're bringing it down to about 60% in the first quarter. The decline in gross margins will primarily be driven by this factor. Additionally, there is a mix effect contributing to some of the gross margin changes. The decline in mix from the fourth quarter to the first quarter is largely influenced by variations within the industrial sector rather than across our overall business categories. This will impact our gross margins moving forward. Following that, we anticipate improving our utilization. We are hopeful that the seasonal ramp in industrial activity in the second quarter will lead to increased volume in our factories, which should help bring gross margins back to current levels.

Our industrial business today, Craig, is about 10-odd-percent off of its revenue peaks that we achieved back in sort of the third quarter of 2014. So I think our goal here is to really get the inventories in good shape, which we're trying to do here in the first quarter with pretty low utilization rates precisely for that reason, to get inventories in good shape for what we hope will be sort of a seasonal second quarter. Obviously, it's too early to call that at this stage. But if we do see sort of seasonality in the second quarter, then industrial generally does better, and we should see some pretty good gross margins and drop through at earnings. So I hope that answers the question and let's get to the next caller.

Yes. So your backlog is up 16%. Is there anything I can read into that number? And I'm thinking especially, since your backlog is obviously for several months further out, if we sort of take the consumer out of that equation, does that number sort of signal that your industrial and communications business is strengthening?

Yes, at the midpoint of our guidance, we're anticipating an 8% year-over-year increase. The backlog you mentioned compares the backlog from last year to this year's backlog, and we expect revenue to be up by 8%, so it's expected that the backlog would also rise. Additionally, the consumer business, which is likely to see a significant year-over-year increase, provides us with more visibility compared to other markets. This mix helps with the visibility regarding backlog, but it doesn't really extend that visibility. Most of it is still shippable within the quarter and does not greatly affect our expectations for the second quarter.

Let me provide some insights. You mentioned industrial and communications infrastructure, so here's a little context on the bookings for the quarter. In August, the industrial sector was quite weak, as is typical for that month. However, September remained stable, which is unusual for our industrial business since September usually shows a stronger rebound. During that time, there were significant macroeconomic headlines. Interestingly, October turned out to be strong for the industrial segment, while November appears to have leveled off a bit. Overall, we're optimistic about the seasonal environment expected in the first quarter for industrial. We haven't highlighted it yet, but our weeks of inventory and distribution were 7.5 weeks, consistent with the previous quarter. Our deferred gross revenue balance, which serves as a good indicator of inventory in the channel, decreased by 2% this quarter. Everything seems to be aligned for the upcoming quarter, and that's certainly reflected in our guidance. On the Communications Infrastructure side, revenue increased by 12% sequentially this quarter. While wireline revenue dipped slightly, it indicates that wireless performed better than the reported 12%. We previously mentioned last quarter that there was under shipment relative to end demand in that sector. This quarter's revenue growth appears to be due to inventory aligning with end demand. We're beginning to see positive activity in base station deployments, though it's still early for definite conclusions. Throughout the quarter, we experienced improved order flow in the communications segment each month. That's the current status, and I hope that addresses your question. Now, let's move on to the next caller.

Yes, just wanted to discuss your approach to capital allocation. If I look at it, you've had a healthy mix. You're certainly focused on dividend increases, the Hittite deal, opportunistic M&A. On the M&A front and especially as the industry consolidates, just how you approached that relative to the return of cash and any type of metrics you're most focused on.

Thank you, Craig. We are indeed focused on the dividend and have expressed our desire for it to continue to increase. Over the past 11 years, we have achieved 12 increases, and we aim to maintain that momentum. We also engage in opportunistic buybacks, which some of our shareholders appreciate. Our approach has been relatively consistent, often buying back shares when the stock is weaker, as this tends to yield a good return on investment for shareholders. Additionally, we take a meticulous approach to mergers and acquisitions, with a high standard for the deals we pursue. We do not explore numerous options, but rather select high-quality opportunities that typically involve companies known for their innovation, which is complementary to our existing technology and customer base. While we occasionally pursue deals, they generally fall within the size range of Hittite or may be smaller. We are actively scouting potential opportunities. Companies that exhibit high innovation often boast strong gross margins, impressive operating margins, and favorable returns on R&D investments, which are outcomes we consider important in alignment with innovative businesses.

One of the main concerns people have raised about your company lately is the concentration issue with your largest customer. Could you discuss the products you offer to this customer, the possibilities for expanding those into additional solutions, and exploring other sectors? Additionally, would you consider mergers and acquisitions as a strategy to reduce concentration?

We have never been more diversified as a company. Our product portfolio is larger than ever, and we serve more customers than we have in the past, putting us in a strong position. In the consumer market, we leverage our core technology platforms effectively. Our approach to consumer products focuses on precision, allowing us to capitalize on our industrial product base, which is inherently precision-oriented. We are continuously searching for areas of innovation. We develop core technologies and adapt them for various applications. In the consumer sector, we are targeting significant challenges that we believe are sustainable over time. While only time will reveal the success of this strategy, we feel optimistic about our positioning. Additionally, as previously mentioned, we strive for diversification in applications and products within each customer, and this approach applies to our activities in the consumer sector as well.

And I'd just add, on the M&A front, we don't drive our M&A off of a kind of a diversification approach because we're concentrated with one customer. We do pick usually companies that have a lot of diversity. And by virtue of that, we do get a lot of diversity. But our first and foremost objective is to find really great technology that complements our existing technology.

Yes. I have a question regarding the comparisons in your comments. Specifically, in the wireless segment, do you believe that the excess inventory has been cleared out, allowing for future growth in that area to align with the growth in base station deployments, even though those deployments are currently significantly lower than their previous peak?

Yes, Chris, thanks for the question. Obviously, never say never, right? I mean, it's a lumpy market for a reason. But our sense, when we look at the order flows, when we talk to our customers, is that, that period of time where the inventories were massively drawn down is behind us. So obviously, we can't speak for other companies and other suppliers. But what we can tell for our products, what we're shipping into the space at the current moment is pretty well balanced within demand in the space. And frankly, when we looked at the order flows and we were thinking about the guidance for the first quarter, generally speaking, the first quarter is down in sort of high single digits sequentially for the comms space. And this time, if you back into the guidance, we're implying it will be fairly stable. So if you look at the regional perspective, North America has been pretty stable. China now has started to deploy TD and FD. Again, it's slow, but it has started, and so we saw some impact and some good benefit for that in our quarter. And if you look at our emerging regions, they continue to deploy. We had a particularly good quarter in India this quarter, for example. So I think things are moving. I think they're slow and steady. But at least, they're going the right direction.

Vince, you highlighted what sounds like what could be sort of a virtuous cycle between your comm infrastructure and market on one hand and the other 3 end markets. And I guess it sort of raises a question as to which of these you expect to grow fastest as you enter this environment or this thing you described as sort of the third wave? And I also wonder whether consolidation plays into that thinking and whether M&A sort of plays into the thinking of where to position relative to the virtuous cycle of data development.

Yes, that’s a great question. We have a long-term growth model and believe the markets that can drive growth the most are in the automotive and communications infrastructure sectors, which align with our 2 to 3 times GDP model. I still hold this belief. We shared some targets last year at the Analyst Day, and I think those targets remain valid. Consumer markets will be at the higher end of that spectrum as well. If we can continue to drive our industrial business at a couple of times GDP, as we have for the last three years, we will be well-positioned for the future. The targets I’ve provided focus on our organic growth rather than implying the need for acquisitions. As Dave mentioned, we are continuously scouting for technologies that enhance our overall solutions for customers. We are taking a strategic approach to mergers and acquisitions, concentrating on finding complementary technologies that enhance the relevance and power of our offerings to customers. Overall, I believe we are in an excellent position to manage our future growth organically.

When we look at your industrial and communications segments and year-over-year comparisons, do you reckon these numbers reflect the end markets? Or are they suppressed by any rationalization of product lines or customer action following the Hittite acquisition?

In the first quarter of 2015, we had Hittite, so there's a direct comparison. In the communications sector, we are operating at a lower level than what we consider to be the normal rate of base station build-outs on a year-over-year basis. This is due to reduced spending in wireless infrastructure across several markets. While there has been some recovery from its lowest point, it hasn't reached what we would define as normalized levels. In the industrial sector, there was a relatively modest year-over-year increase, aligning with a GDP-like growth rate, which likely reflects normal end demand in that market.

Yes, I will say, David, just to add a little more color, we had a record quarter with regard to the Hittite portfolio in the quarter just gone. And given our relatively depressed communications market though there was some recovery, what I've been most pleased about is the diversity of the applications we're able to target outside of the Communications Infrastructure business with that portfolio.

I think Ali mentioned in the prepared remarks that the automotive compound annual growth rate has been around 9% over the past few years, indicating solid performance. However, it has slowed a bit, showing flat growth in fiscal '15. Given the guidance for Q1, it seems likely that this will remain flat year-over-year. The team has indicated a stronger design win pipeline in dollar terms captured in 2016 within the automotive segment, so my question is whether the team still feels confident about the possibility of re-acceleration in the automotive sector. Additionally, which subsegments are expected to see more growth—will it be in powertrain and safety, or will there also be growth in Infotainment?

We have received numerous inquiries over the past few quarters regarding our performance, particularly in the automotive sector. It's been a mixed bag in 2015. While it was a relatively flat quarter overall, our MEMS safety business has faced some challenges. However, excluding MEMS safety, our automotive business grew in the high single digits year-over-year, mainly driven by Advanced Driver Assistance. The predictive safety segment has seen significant growth over the past few years and I anticipate that will continue. The powertrain segment, especially in sensing and battery monitoring control, has performed well and is expected to maintain that trajectory. Infotainment is diverse, and we focus on the higher end of the market utilizing our digital signal processing, data acquisition technology, and algorithms. We have introduced a new technology called A2B, which efficiently transmits sound within vehicles, offering low latency and reduced wiring weight. We are also advancing in new sensing technologies, particularly in AMR, where we are establishing a leading position as vehicles electrify and become more automated. For the automotive business in the coming fiscal year, I expect the first half to align with the current business seasonality. However, I foresee growth accelerating in the second half, likely at a rate of three times GDP. We are optimistic about this growth based on product alignment with customer programs, and we have been significantly increasing our investments over the past five years. I believe we will return to a growth trajectory towards the latter part of 2016 and beyond.

I just wanted to clarify on this overbuild versus underbuild in consumer so we don't blow it out of proportion. So Dave, on Q4, you mentioned some slight overbuild. Is it possible to quantify that? And then as we then look at Q1, I assume there is perhaps some underbuild. So as you emerge from Q1, are you going to emerge with some signs of shipping into actual demand? And I know it's probably a little early, but how does rough visibility look like for Q2?

We have limited visibility into Q2, so it's too early for me to indicate which direction it might take. I don’t want to overemphasize the build. We believe that most of the shipments were consumed. However, during the transition from the fourth quarter to the first quarter, we anticipate some digestion occurs, which leads us to believe that sequentially, consumer demand will decline, and that’s why we are providing that guidance. It is likely to decrease more than the corporate average. Beyond that, I can't provide additional visibility. There are many variables within the consumer business, and identifying every application and customer along with their activities is nearly impossible for us. We receive and ship the orders, and we leave it to them to determine their next steps.

It's probably a good time to just reemphasize that despite all of this sort of near-term noise that year-over-year revenue growth in the first quarter at the midpoint would be 8% with double-digit EPS growth. So thanks for the question, Vivek.

Just a quick follow up on the out-performance in the quarter. I think you mentioned that it was due to multiple products here in consumer. Obviously, there's been some discussion of force touch. Can you talk about what products other than force touch were part of the out-performance in the quarter?

I'm not saying that was the reason for our strong performance this quarter. What I can say, Steve, is that we have many customers in our consumer business, a significant presence in the portable segment, and a wide range of products that cater to those applications.

Yes, to give you a sense, the products we ship into these applications tend to be precision-oriented in areas like sensing, audio, and also in image processing. So those are the three categories you should consider when thinking about ADI's position within these portable consumer applications.

Thanks, Steve, this is Ali. Since we're almost at the hour mark, we'll continue with the questions. Unfortunately, it seems like we've run out of time for those who have re-queued. Let's proceed to ensure everyone has a chance to ask their initial questions.

I guess, overall, looking for your kind of big picture macro view here. What are your thoughts in terms of where we are in the cycle? Where do you see pockets of health, maybe pockets of weakness and there really speaking geographically? And how all of that shapes up in terms of the recovery picture in the first half of '16?

I'm not sure there is a cycle in the semiconductor industry anymore, and I believe that the consolidation contributes to this. Currently, there seems to be a good balance between supply and demand. Over the years, we've developed strategies to manage volatility, and there's much more visibility now into supply and demand dynamics. For 2016, I think it's essential to consider the macroeconomic environment. We've begun to communicate our growth trajectory based on this, factoring in the various markets we operate in and their potential for macro growth, along with our products, technologies, and customer relationships. Thus, I'm not convinced there's a distinct cycle in our industry anymore, and it may be wiser to focus on the macro environment across different regions.

To follow-up on your commentary about automotive. What type of market share position do you think you can have in driver assist over the next couple of years and on the basis of your design wins? And how big does it get as a percent of your automotive market?

Yes, that's a great question, Tristan. I don't have the numbers right now, but the growth rate of our advanced driver assistance business has been among the strongest, likely the strongest growth segment in 2015. It has become a significant part of ADI's overall automotive business. We are excited about some new technology based on microwave advancements that we will begin sampling to our customers over the coming year, which has the potential to revolutionize radar technologies. When looking at this business overall, safety will continue to be a vital aspect, especially with the current mandates and the growing demand for enhanced safety. Additionally, our capabilities in active and passive safety, as well as predictive technology, position us uniquely to address safety challenges comprehensively and tailor our solutions to meet those needs.

Dave, I had a question about the capital expenditure guidance for the full year and, related to that, the free cash flow margin. Since a higher return on investment and a greater operating margin will be a larger part of our business mix, should we anticipate that the free cash flow margin for fiscal '16 will be higher?

Yes, we are definitely focused on increasing free cash flow, which is our goal. Regarding capital expenditures, we aim to maintain them at around 4% of revenue. This year has been strong for free cash flow, and I believe we can improve next year by reducing CapEx as a percentage of revenue. Additionally, we had to increase inventory this year due to some ramps and last-time builds related to Hittite, but those inventory builds are now behind us. Therefore, we expect to see a more favorable working capital figure for 2016, which could lead to improved free cash flow for that year as well.

Yes, and if I can just add quickly, Ambrish, free cash flow for the year excluding the one-time pension payment was 29% of revenue. The model range is 28% to 32%. So I think we're within that range but certainly towards the lower end of the range. And within the quarter, we generated ex that payment, 38% of our sales in free cash flow, which was actually very, very strong, and as you know, we returned 80% of everything we generate to shareholders, either through dividend or buy back. So thanks for the question.

The results and guidance are impressive. I would like to ask about wireless infrastructure. It's significantly below the peak you experienced in January of this year. You mentioned that there are positive trends currently in wireless infrastructure. What is your perspective on the outlook for next year and potentially 2016 for communications?

Yes. As Ali mentioned earlier, from a geographical perspective, North America has remained fairly stable. The demand has mainly been influenced by China throughout FY '15. Investigations into government carriers have significantly affected the development of infrastructure there. I believe the pace will accelerate, and we've already seen some improvement over the past quarter. Demand has become more solid and strengthened. In 2016, we can expect an increase in FD deployments, particularly in FTD and TD, and notably with regard to China Mobile's small cell deployments in the latter half of the year to enhance network densification and capacity. Additionally, 4G deployments have improved, as seen in India over the last quarter, where LTE deployment has been quite low and has significant room for growth. In America, I expect steady progress, and there may be marginal growth in Europe as carriers enhance their networks to transition many areas from 2.5G to 4G.

So Harsh, I think it's a question of when, not if. And I think we're very well-positioned across all the carriers and all the regions. So inventories look to be in good shape. The orders, hopefully, will hold up. As you mentioned, our comms business is well off its peak, so I think, I look back and it's about 23% off of its recent revenue peak. So I think there's plenty more to go there, and it's a question of when, not if. So thanks for the question.

Had a question on the cash flow in the capital allocation side. You guys have done a great job returning cash, like you said, about 95% of free cash flow in the last year. But that comes somewhat at the expense of domestic cash, which looks like it's down about 20%, 25% year-over-year. So I guess my question is, when you guys have the domestic versus offshore cash, how do you reconcile that with both your cash return to shareholders, whether it's repurchase or dividend? And how does that impact your M&A strategy, if at all, acknowledging you were able to use offshore cash for Hittite?

It's a complex situation, for sure. Generally speaking, if we are returning 80% of our free cash flow to shareholders, we do not generate that much in the U.S. As a result, all of this has to come from U.S. cash flow. Therefore, the U.S. entity will definitely need to borrow. This is reflected in our $3 billion cash on hand and $875 million in debt today, as we've leveraged the U.S. balance sheet. However, on a global scale, we still maintain a net cash position. This is typically our approach. There are circumstances where we might use international cash, such as for acquisitions, and as you noted, there are a few opportunities for acquisitions outside the U.S. where utilizing that cash would not be overly complicated. We will certainly allocate some of that cash for mergers and acquisitions, but if we require U.S. cash, we will leverage our resources to obtain it.

Yes, and Ross, we have overall liquidity domestically of $1.3 billion to $1.4 billion, which obviously includes the revolver as well. But that gives us plenty of flexibility to do the things that we want to do here in the U.S. So...

This is Chris on for Blayne. It feels like it's beating a dead horse here. But I just wanted to kind of drill in on the consumer business. And if you could just talk a little about linearity over the last couple of quarters for the core business there. You've obviously had a big ramp in the consumer wireless space. But just the existing business outside of that big ramp, how has that trended over the past couple of quarters?

Looking at the last quarter, I would say that orders, excluding the consumer business in August, were down compared to the previous quarter. They saw a slight increase in September, and October was very strong, especially in the industrial sector, following a weaker September. That's the general trend. We have also provided guidance for the first quarter based on our observations of the order flow. Excluding the consumer business, everything else is trending seasonally in the first quarter. Thank you for the question.

Could you provide an overview of the gross margins across the industrial, consumer, automotive, and communications groups? While I understand that the industrial sector is experiencing some challenges based on your guidance, I had assumed that the consumer sector's below-average performance would balance things out slightly. It would be helpful to clarify the expected range across these businesses to enhance our understanding moving forward.

The industrial business is our highest gross margin sector, exceeding the corporate average. The communications sector is slightly above the corporate average, while consumer and automotive are both slightly below it. However, the production dynamics in the factory can influence these gross margins, as the mix of products made affects overall output. Overall, we had a strong year for gross margins in 2015 at 66%. We believe that by concentrating on innovation, we can continue to achieve good gross margins in the future. We are pursuing several initiatives aimed at reducing costs and enhancing pricing. In fact, our average selling prices have been increasing over the past few years, which presents a promising opportunity to further increase gross margins in the years ahead.

Yes. So obviously, you're addressing a lot of opportunities here in converters and amplifiers. You've got good portfolios there. But could you remind us of your view on power management? Is this an area you'd like to get into perhaps to leverage your scale in customer-facing resources? Or is it not interesting at this moment?

Well, power management as a technology for us, we have good traction in areas like communications infrastructure. For us, we are not trying to build a broad-based catalog of products. What we are doing is taking the capability that we have inside the company in terms of process, technology and in terms of circuit technology and applying that technology to build products that strengthen the overall signal chain, particularly in more kind of vertical applications, where we can get the leverage in areas, as I said, like wireless communications infrastructure. So that is the strategy for the company and power management. And we've made some very, very good progress there over the last 3 or 4 years as we have given up the ghost in trying to build a broad catalog and brand in power. But instead, targeted very, very carefully at the applications, where the interplay of power technology and signal chain technology creates a virtual cycle here.

I just wanted to ask a follow up on automotive. You gave great color over on some of the tech trends there. But just from a geographic and maybe kind of bigger, macro picture perspective, was China the only area of weakness? Or were there any other geographies that also showed softness in the quarter? And in addition to that, just with the potential for interest rates to increase in the coming quarters, do you think the higher cost of lending might impact auto sales as well?

Yes. I think we're not a room of economists here for sure. But let us, at least, tell you what our thinking is, Stephen. So in the quarter, the business trended really as we expected, frankly. It was up 1% sequentially. All the 3 subsegments of automotive were essentially in line and pretty stable during the quarter. When we started the year, the forecast for vehicle growth in China was 7%. And as we're ending the year here, it's down to about 1% or 2%. And China, obviously, consumes a good amount of premium vehicles. For ADI, we've done sort of the back of the envelope math here on our revenue in the automotive space, and it's probably sort of mid-teens impact from sales into China. So certainly, that would have an impact on our revenue. I think when you look across the other regions, I'd say North America has been doing quite well. The European vehicle registrations every month are up. So that's generally a good sign. When you look in North America, the average age of the vehicle is greater than its historical average. Dealer inventories are below their corporate average. And China, they've recently announced stimulus programs on sales tax for automotive. So again, I'm not an economist, and I don't play one on TV either. But I guess from our sense, everything is sort of trending as we would've expected, except, I'd say, for the China region, which certainly has been weaker for the entire industry. And so certainly, we're not going to be agnostic to that. That would have an impact on our sales as well, particularly as China consumes a fair amount of premium vehicles. So I hope that answered your questions, Stephen, and I guess that's the end of our earnings call here. We're 15 minutes past the hour. As a reminder, our first quarter 2016 results are scheduled for February 17. Again, 8 a.m. press release, Eastern time, 10 a.m. earnings call. So thanks for joining us this morning. We look forward to talking to you soon.