Analog Devices Inc (ADI) — Q1 2017 Earnings Call Transcript

Okay. Great. Thanks, Jennifer. Good morning, everybody. Thanks for joining the Analog Devices First Quarter 2017 Earnings Conference Call. You can find our press release, related financial schedules, and the CFO commentary at investor.analog.com. With me on today's call are ADI's CEO, Vincent Roche; and ADI's CFO, Dave Zinsner. So before we start, let's get through some disclosures. Please note the information we're about to discuss, including our objectives, outlook, and the proposed acquisition of Linear Technology Corporation, 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. With the exception of revenue, our commentary about ADI's first quarter financial results will exclude special items, which in the aggregate totaled $85 million for the quarter. When comparing our first quarter results to our historical performance, special items are also excluded from the prior quarter and year-over-year results, and reconciliations of these non-GAAP financial measures to their most directly comparable GAAP financial measures are included in Schedules E and F in today's earnings release, which we have posted at investor.analog.com. So with that, let's get started, and I'll turn the call over to Vince.

Thanks very much, Ali, and good morning, everyone. So by any measure, our January quarter results were stellar. Revenue of $984 million was well above the high end of our guidance, growing 28% over the prior year. And we have broad strength across all our markets. And we expanded operating margins over 700 basis points from the prior year to 35% of sales. Earnings per share of $0.94 was up 68% from the prior year and $0.16 better than the high end of our guidance. Importantly, we have generated $1.2 billion in free cash flow over the past 12 months. This was a terrific start for the fiscal year, and we continue to see momentum in our business and in our customer engagements. Our R&D efforts are squarely focused on the most exciting trends in the industrial, automotive, communications infrastructure, health care, and consumer markets. I'd like to give you just a few examples of where ADI's technology is making a real difference. In the area of data converters, for example, where we're the market leader, we once again established new performance benchmarks with our next generation of high-speed ADCs and DACs that exploit 28-nanometer CMOS technology combined with proprietary architectures and algorithms. By providing 4x improvement in critical high-dynamic range parameters, these converter platforms are enabling the next wave of gigahertz bandwidth, software-defined systems for 4G and 5G communications for test equipment and also in several aerospace and defense applications. It's the radio or radar equivalent of going from watching television using the old bunny ears to watching high-definition TV. We can now give our customers the ability to see things that they did not know were even there, and this is a real game changer. In addition, our previously introduced high-speed signal-processing platforms achieved record revenue based on our integrated transceiver platforms, which helped our communications infrastructure customers and beyond efficiently address the challenges of accelerating global data consumption. These solutions are equally well-suited to and are increasingly finding their way into a diversity of applications in industrial instrumentation, aerospace and defense, and indeed, the automotive markets. In factory automation, our software-configurable input-output solutions are enabling our customers to create flexible and agile platforms that can be readily expanded and reconfigured to support more sensing and control channels on automated factory floors. In addition, in motor control and robotics applications, our measurement, control and isolation products are driving improvements in motor efficiency, precision, and reliability while maintaining the highest levels of safety and industrial robustness. ADI's health care solutions span both B2B and consumer applications. On the B2B side, we're enabling higher channel counts and throughputs in high-performance imaging systems that lower our customers' overall cost per channel but importantly drive higher ADI content per system. And on the consumer side of health care, our vital signs monitoring technology is enabling highly accurate and ultralow power measurements of critical health parameters, improving personal wellness and overall quality of life for the end consumer. Health care for ADI is now a high-growth business with its annualized growth rate running in the double digits. In automotive, our 77-gigahertz RF CMOS radar solution offers a robust platform for ADAS in autonomous driving, giving customers the ability to capture objects earlier, more reliably, and with greater precision and over much longer distances. Our investments in cost-effective, high-performing silicon-based LIDAR solutions are turbocharging our efforts in this area. These are the types of innovations that ADI is bringing to the market to better serve our customers' needs, and our industry and the market is taking notice indeed. In recognition of our overall innovation efforts, ADI received the 2017 IEEE Innovation Award and was once again selected by Thomson Reuters as one of the 100 most innovative companies in the world. It has been said that innovation distinguishes between a leader and a follower, and ADI is very much at the cutting edge of innovation. This value forms the bedrock of our company's culture and belief system and is shared equally by Linear Technology. So with that, let me give you a brief update on the status of the proposed acquisition of LTC. Thus far, we have received 6 out of 7 regulatory approvals needed to close the transaction, and our integration planning teams have been hard at work to combine the best of both ADI and Linear Tech in order to present one face to the customer on day one. Also, I'm delighted that Bob Swanson, the Founder and Executive Chairman of Linear Tech, plans to join ADI's board after the deal closes. We're all very excited about the combination of ADI and Linear Tech, which we believe will create an analog industry powerhouse that will accelerate innovation and revenue growth opportunities in our core markets of industrial, automotive, and communications infrastructure markets, which indeed are the most lucrative markets in our industry. The transaction is expected to be highly accretive to ADI's non-GAAP earnings per share and free cash flow. It makes ADI the #1 or #2 player in all major analog product categories, enabling us to solve our customers' analog system problems from end to end. So overall, this was a remarkable quarter across multiple dimensions, and we see the momentum continuing into the second quarter. So with that, I'd like to turn the call over to Ali for some more details on our performance by end market in the quarter just passed.

Great. Thanks, Vince. So just digging deeper in our results by end market, the industrial market was 41% of revenue. It increased 1% sequentially, which is really very strong in what's typically a much seasonal and slower first quarter compared to the fourth. We didn't really see much of a slowdown over the holidays, and I'd say January order rates were also very strong. Within the industrial business, industrial instrumentation applications outperformed our expectations, and I'll highlight the ATE market as one that was particularly strong. The factory automation sector within industrial had a very good quarter. Compared to the prior year, the industrial market showed considerable strength, growing 15%, and really was broad-based strength across all the industrial sectors, so that's a very good result. On the automotive side, the automotive market at 14% of sales was also better than seasonal. It decreased really only slightly from the prior quarter but grew a very strong 10% over the prior year, led by really content-rich applications such as infotainment, powertrain, and ADAS. On the communications infrastructure side, revenue there in that market was 18% of sales, again was also ahead of expectations, increased slightly sequentially, and was up 4% over the prior year, led by optical networking. The consumer market was 27% of sales in the first quarter. It decreased 8% sequentially, which is much better than seasonality as we saw continued strength in portable consumer applications. Consumer more than doubled over the prior year in the first quarter. So with that, I'll turn over to Dave for details of our financial performance in the first quarter and our guidance for next quarter. With the exception of revenue, Dave's comments on the P&L line items are on a non-GAAP basis. So Dave, it's all yours.

Thanks, Ali. Fiscal 2017 begins on a strong note, with ADI achieving impressive results in revenue, profitability, earnings per share, and free cash flow. Revenue for the first quarter reached $984 million, and diluted earnings per share were $0.94. Gross margins improved to 66.1%, exceeding our guidance due to a favorable business mix and increased revenues. Inventory decreased by $11 million from the previous quarter, maintaining days of inventory at 101 days, down from 105 days. Utilization rates in the first quarter were in the high 60s, with plans to boost this to the mid-70s in the second quarter. Distribution inventory remains lean at approximately 7 weeks, consistent with the previous quarter. We also recorded a $49 million restructuring charge, mainly due to a voluntary early retirement program for certain U.S. employees. Excluding this and other special items, operating expenses rose 7% sequentially, entirely linked to our variable compensation program focused on year-over-year revenue growth and operating margin metrics. Operating margins rose to 35% of sales, showing an expansion of over 700 basis points compared to the previous year, driven by strong revenue growth and careful expense management. Other expenses in the first quarter were around $26 million due to partial costs of the permanent financing for the Linear Tech acquisition. We anticipate net interest expense to be about $30 million per quarter until the Linear Tech acquisition is finalized. Our tax rate for the first quarter was approximately 8%, which we expect to hold until the acquisition closes. Excluding special items, diluted earnings per share rose 68% year over year to $0.94. The first quarter also saw strong free cash flow, generating $286 million, a 46% increase from the previous year. Over the last 12 months, ADI has increased free cash flow by 20% to $1.2 billion or 34% of sales. Capital additions in the first quarter were $28 million, and we project capital additions in 2017 to range from $130 million to $145 million. To create shareholder value, our Board of Directors approved a 7% increase in the quarterly dividend to $0.45 per share, equating to an annual dividend of $1.80 per share. Looking ahead to the second quarter of 2017, our expectations, excluding known special items, are based on non-GAAP measures. Following a record-setting first quarter, we’re forecasting growth in the mid- to high digits sequentially for the B2B markets in industrial, automotive, and communications infrastructure, with high single-digit growth compared to the prior year. For the consumer segment, we anticipate a decrease of 40% to 50% sequentially, although this segment is expected to see significant year-over-year growth in the second quarter. Overall, we project second-quarter revenue to be between $870 million and $950 million, which would indicate 17% year-over-year growth at the midpoint, marking the fourth consecutive quarter of revenue increases. Gross margins are expected to be around 66.5% to 67% due to higher utilization rates and a better mix. Operating expenses are estimated to decline by approximately 3% to increase by around 1% sequentially in the second quarter. Based on these estimates, excluding special items, diluted earnings per share are expected to range from $0.74 to $0.86, suggesting robust year-on-year earnings growth of about 25% at the midpoint. In summary, the first quarter provided a very positive start to the year, marked by solid year-over-year revenue growth, strong earnings, and cash generation, and we are optimistic about continuing this momentum into the second quarter. We are now ready to take any questions you may have.

Great. Thanks, Dave. So operator, it's all yours.

Relative to your initial guidance, the significant improvement in the January quarter came from the consumer segment. I'm curious about what changed during the quarter. Was this primarily due to a better mix with your large consumer customer that resulted in more content for larger screens? As you consider the potential of that customer, how do we view content heading into the second half of this calendar year?

So I would say that, in general, with the consumer customer, sometimes, it's hard to totally predict the weekly shipment level through the entire quarter. We make an estimate based on what we think will turn to the quarter plus what we come into the quarter with backlog. There are varying scenarios related to how that would unfold, and this was obviously the most optimistic scenario so it just turned out better. I would point out, though, that we didn't expect nearly the strength we saw in the B2B markets either, and so they contributed to the upside as well. We're really happy that every end market did a bit better than expectations. So that was awesome.

So just to add to what Dave has said there, John, we, as you know, have been working hard to diversify our position and decrease dependence on any single socket. We have more content in these applications today than we had this time last year so that certainly helps as well. We've got more ASP per system and we continue on the track of diversifying to get more and more sockets in that area.

It looks like you announced a new distribution agreement overnight. Could you maybe elaborate a little bit on that and maybe this is an opportunity to just talk about the strategy going forward?

Yes. So we've had a 3-decade relationship with distribution or maybe 25 years with the distribution channel in general. What we're striving to do, Tore, fundamentally is deepen the level of support and provide a better breadth of service for our customers. We have many tens of thousands of customers. The channel plays an important role, I think, in the broad breadth of logistics and services across the entire suite of customers and particularly with the smaller customers providing a lot of design service. So basically, we've decided to simplify the structure to enable us to bring the level of support that we desire. We expect to be able to leverage a more focused channel team and essentially draw on a more comprehensive suite of end-to-end support services, including design help, prototyping, and logistics support over the long term. We have been investing for all our customers, big and small, over the last several years by bringing on more direct resources and really understanding the role of the channel. So we're in a good place right now. When we combine with LTC, we will also have the opportunity to bring more field applications and sales resource to a broader breadth of customers. Overall, it's part of our fundamental strategy, which is about innovation, diversity, and operational efficiency.

Thanks for the update on Linear events. And Dave, last quarter, you had given us an update on the accretion on the tax rate. Now that you've spent quite a bit of time in California, I was just wondering how should we think about the top line. At CES, we had some early views on how a go-to-market would look like on a board with Linear and ADI in an automotive example. So my question is really when should we be expecting it to show up and in what end market should it show up first?

I would say we get more and more enthusiastic about the opportunities for combining technologies of Linear and ADI every time we meet together as a team. We have built in some expectation that we will get several hundred million dollars' worth of revenue synergies with the combined business. Some of that will take some time. A lot of it is going to be in areas where the design cycles and the time to revenue is quite long. It might be out in the 2024, 2025 timeframe where you really start to see us hit our stride. But within these first few years, we'll start to see some revenue synergies. I would point out that's kind of similar to the path we're on right now with Hittite. We're starting to see it trickle in a little bit in the early stages. We've certainly seen it build up in the opportunity pipeline for the subsequent years here. We just get more optimistic about what we can do as a company in terms of delivering technology.

Most of the business of Linear targets the core markets of B2B. We see opportunity. At CES, you saw how ADAS, for example, combines the power technology of LTC with the mixed-signal technology and RF technology of ADI. We have examples of this in industrial automation, instrumentation, aerospace, and defense. Basically, everywhere we play, including communications infrastructure where ADI is much stronger on the wireless side, and LT is strong on the wired side, there's good symbiosis between the companies, particularly in the B2B space. The first couple of years of the combination of ADI and LTC are really about how well we take the pipeline of opportunity and convert that into servicing our customers.

I'd also point out that, just on the expense side, we feel very confident about our $150 million spend synergy. Part of this is related to a voluntary retirement, making some room to integrate the Linear Tech people within the company. I think we've made a meaningful down payment on the $150 million already in advance of integrating. The public company expenses go away pretty quickly, too, and that's $20 million to $25 million of expense. We are very confident now that the $150 million is very achievable.

Dave, you piqued my interest on the Hittite revenue synergy side. Can you give a little bit more detail or anecdotes in terms of some of the things you're seeing from a design or revenue ramp perspective on Hittite?

Yes, Vince will probably do a better job of this. But I would tell you that in areas like aerospace and defense where they were particularly strong, we have pulled a lot of ADI content onto those systems and subsystems. That's been a big win for us. I think we did not appreciate how much opportunity we had in that area until we really acquired Hittite and had that opportunity. There's a lot of radar capability that's required for the automotive space, and we're taking a lot of the capability we got from Hittite to be able to drive into that. The next generation, which we've talked about in the past, is 77 gigahertz for ADAS. A lot of the capability that we pulled in from Hittite has helped in that regard. Hittite didn't have an opportunity to really address the larger OEMs, and around the edges, they might have won a little bit of business. But they weren't breaking into the post OEMs in any meaningful way. That's all changed since they became part of ADI. These are $10 million, $20 million, $30 million opportunities if you do them right. We estimate that we filled in the pipeline to the tune of $100 million of opportunities because of having the two entities combined.

Yes. At the time of acquisition of Hittite, the revenue stream was roughly $70 million a quarter. We're running at a substantially higher level than that right now. To add to what Dave has said, the conversation with our customers has changed over that period. Hittite and ADI have gone from being potent component-level suppliers to now being able to architect our customers' systems. We're working at the application level rather than the component level. Our customers are dealing with thinner levels of resource and capabilities in terms of engineering their analog solutions, and we're very well positioned. Hittite's helped enormously in the RF and microwave side, and Linear Technology will help us on the analog systems side primarily.

Considering the upside in the January quarter and then the guidance for the April quarter, what should we be thinking about conceptually for seasonal revenue growth in the July quarter? And what are your expectations for the 4 basic food groups of end markets for revenue growth this year?

Well, seasonally, usually sequentially, the third quarter is up. You tend to see a stronger consumer environment and the rest of the markets either are up or flattish. The fourth quarter generally is sequentially up again pretty meaningfully because you really start to see the consumer hit. Every end market has the opportunity to grow meaningfully from the prior year. We'll have to see how the rest of the year shakes out. But we start off in a great situation. Our expectations for the second quarter, based on our backlog, look really good. This continues into the third and fourth quarter; I think every end market is going to do pretty well for us.

I guess a question on the consumer side. It's clearly been better than your expectations. Could you just talk about how you think about the segment over the next 12 months in terms of portables versus the rest of the consumer opportunity you have? And I think this January with your largest customer, you had talked about picking up 30% more content. Do you think that's possible again as they go through what, I guess, a super cycle product for the next year? Or do you see opportunity with your largest customer more in sync with the unit trajectory they have?

Our consumer business is really a tale of 2 stories. We have prosumer, which is more akin to a B2B-type dynamic, with many customers, many very high-performance building blocks from DSP to mixed-signal, in areas like audio and video signal processing. We saw some downturn of that business over the last couple of years, but we believe we're at an inflection point there. On the portable side of things, we're clearly in a much better position than we were a year ago. We're working hard to diversify to get more sockets in things like image processing and sensing in general. We are engaging with many more customers than we did on a constrained, highly leveraged R&D budget. Is it possible that we get another 30% increase? Of course, it is, and that's what we're working hard to do to make sure we grab all available high-quality sockets that our technologies will match to.

I wanted to follow up on a couple of the segment dynamics. Industrial looks like it's at record revenues, at least in my model, and there seems to be incremental strength that would come from areas like energy extraction, which I suspect may not be as strong as in the past. On communications, the business has been barely stable for the last 4 quarters. Is the strength that you're seeing leading to a more material increase versus trailing fourth quarter levels? Or are we seeing a seasonal bump and nothing more than that?

Okay, let me take a shot at it. I'm sure Vince will provide better color than I can give. The industrial business did hit a record this quarter, which is interesting as it happened in our first quarter, which tends not to be the strongest industrial quarter for us. We expect it to be sequentially up in the second quarter. While it had a relatively pedestrian last year, there were a few macro elements that impacted it. Those have abated now. All subcategories within the industrial space are showing good strength, and it does look like it's moving into a period where we start to see some meaningful growth. We made a lot of investments in that market, and there are many opportunities for analog content, and we’re starting to see the benefits.

Yes, something we don't talk an awful lot about in our wired business as well is cable infrastructure. A lot of our new mixed-signal and data-converter technologies enable carriers there to realize 4K and 8K video. Without our technology, it would be impossible to achieve that within constrained physical space as well as power budgets. Our wired business is poised for very decent growth.

You mentioned you got 6 of the 7 clearances you need for the Linear deal. Can you remind us which the 6 are and what the seventh is you're waiting on and then an update of when you expect the deal to close?

I'll butcher the 6, so let me just tell you the one that we don't have. We certainly have the U.S., and we have all the Europe ones. We have all of Asia, except for one, which is China. We're waiting for China to approve it. It's a well-documented process, which is why we expected this to close around the end of April. It's going very well. We think we are on schedule to close this by the end of April at this point.

My question is on the automotive segment. It's very good to see sales acceleration over the last couple of quarters despite some past headwinds in some products. But when I look at some of your analog peers, say Texas Instruments, they grew their auto business by 20% last year. When do you think those legacy headwinds will start to abate and you can close the growth gap with some of your peer group?

We're better and better positioned with our customers, but just for the record, our infotainment business grew in double digits over the past year, as did much of our powertrain battery control technologies. Some segments have performed well in the double-digit area. We've talked before about withdrawing from parts of the MEMS-based safety market, but we still have an important role in high-end inertial and gyro-sensing technologies for active safety control. Our ADAS technology continues to do very well, particularly with the 77-gig technology we showcased at CES. We're investing heavily in the space because we think it is a growth driver for many years to come for ADI.

Linear Tech's technology in battery management systems has seen growth probably in excess of 20% in certain years. Bringing that into the fold should help drive growth and synergies, allowing us to tap into areas where we have good customer traction and vice versa.

I wanted to ask a question about gross margins. In the quarter in the guide and longer term, I was surprised that it was as strong as it was, given that the consumer side was strong. I would have thought that mix would have been a headwind. Conversely, I thought that would have been true in the April quarter, where the combination of mix being a tailwind and utilization rising might actually lead to upside. Can you provide some details on that?

I would say if you remember through all of 2016, we kept utilization relatively in check and really worked the inventories down because we wanted to get the days down below 110 days. We did achieve that by the end of the year. Normally, coming into the first quarter, we're not positioned well in terms of inventory levels, and we end up having to bring utilization down in the first quarter; that didn't happen, which helped gross margins. The industrial business did very well through the quarter, so there was no reason to crank down the fabs. There was an impact from mix, but it's not quite the headwind or tailwind you'd expect. For the second quarter, as you point out, we should have a bit better mix and are bringing up utilization, although modestly, to the mid-70s. If the mix shifts with consumer dropping 40% to 50%, we might be at the high end of that gross margin range, approaching 67%. We're hedging ourselves a bit just in case we can't crank up utilization to those levels because that does require us to crank through the wafers.

On the aerospace and defense, obviously, that drives good diversification within your business. Fundamentals appear to be fairly solid. I think there are large radars and satcom programs firing in both defense and commercial sectors. How was the A&D subsegment tracking growth-wise on a year-over-year basis relative to the 10% to 15% growth trend in the industrial segment?

It's been growing obviously at a very healthy clip over the last year or two in the high single digits. In this quarter, it was probably in the mid- to high single digits year-over-year.

Probably in that range. This is typically a multiple of GDP growth, so it will likely correlate to how GDP grows; probably mid- to high single digits.

I want to follow up on the B2B business. It's growing high single digits; if you take out communications, it's double digits. Many analog peers see similar growth, as it's really a function of no seasonality and growing off that base. What do you think is driving this growth, and how does it affect seasonality?

I think last year, it didn't grow that much, so it's rebounding off a slower environment in 2016. Also, we focused our R&D efforts largely in this space. We've made it fairly public that we moved a lot of our consumer R&D into B2B, particularly industrial markets. Eventually, that development translates into revenue. Some of what you see in the results this quarter is that opportunity translating into revenue.

America and Europe are very important as the bedrock of our B2B business. We've been particularly pleased with growth in Asia over the last couple of quarters. It's broad-based and strong in Europe and America, but even stronger on a growth basis in Asia at this time.

There’s good inventory consumption across various regions, particularly in Asia. It's not pronouncing any inventory issue.

I had a question about the Linear Tech pending acquisition. There’s a view that there are significant cultural differences between the two companies. What have you learned as you've built the plan to integrate the businesses regarding cultural differences and what you see as the biggest risks and opportunities?

A good question. What we stand for as companies around innovation driving business success, that we drive diversity, which gives us resilience in chosen markets. We're companies that focus on generating great free cash flow through operational efficiency and good price management. These are core business values we share. There are differences in the way we achieve our goals in terms of behaviors and routines. Our approach to creating something better than the sum of the parts is to leverage the best of both cultures, pooling our business and operating processes together.

The enthusiasm from both sides is a concern in waiting for the bureaucracy to catch up. We're waiting to get started quickly to ensure that the combination is more than the sum of its parts.

I had a question about your recently acquired LIDAR business. Could somebody talk about how its current position stacks up against the competition and how big of a revenue opportunity you think this could be over the next few years?

At an application level for future semiautonomous and autonomous driving systems, you need many different types of eyes looking for signals. Today, radar and cameras are important modalities, but LIDAR is becoming very important. Our approach with the acquired business enables us to bring more silicon-based technology, which is inherently mechanically robust and allows us to apply signal processing to core sensing and actuation technology. I believe LIDAR will be a very important part of realizing autonomous driving systems.

Vince, you've talked about underlying health of global GDP trends. I guess, I'm just curious where you see yourself gaining share in some B2B subapplications versus the underlying market support.

In core industrial, we've been pleased with our performance in Asia, which resulted from customer engagement and deployment of R&D. A certain amount of what we're seeing is driven by macroeconomic factors. But we're also well positioned to take advantage of strengthening markets in industrial and health care, driven by our innovation efforts and customer engagement.

Industrial markets are undergoing a change much like automotive has with electrification. The amount of analog content and semiconductor content in systems is increasing as companies try to implement these IoT-like applications.

As customers become more software-oriented, our dependence as a leader in analog technologies increases. Our technology solves important problems for customers by providing integration in universal input-output systems, enabling them to leverage their software across various analog input-output technologies.

I had a question about the B2B outlook for the April quarter. The industrial market typically grows 10-plus percent in April, and you said auto is not too dissimilar. The guidance of mid- to high single digits suggests you might have some room to do better. Am I mischaracterizing seasonality? Can you discuss that?

It's more a function of coming off strong numbers in the first quarter; you're not going to have quite the sequential improvement in the second quarter. But year-over-year growth is meaningful. We're starting off in a great situation, and we expect a reasonable good second quarter.

Remember, we're at record levels in our industrial business.

Can you share your thoughts on OpEx growing at half the revenue growth rate? How should we think about net leverage at deal close?

We're going to lag the revenue growth, possibly grow at half the rate, and operate similarly after the Linear Tech integration. As for net leverage, due to accumulated cash and good quarter cash flow expectations, we will likely come in under previous estimates. We believe the combined business's free cash flow will be strong.

On industry conditions and demand, do you see evidence of tightening supply conditions in your business or industry?

When we look at inventory levels and distribution, they're at the low end of what we expect them to be. We still meet our stated lead times for product delivery, so overall, things look quite good in terms of supply.

For your direct customers' sales, how do their inventory levels look? With better just-in-time manufacturing, is lower inventory in the distribution channel still a good lead indicator?

The answer is yes; 50 is an indicator, but customer inventory levels matter more. We don't have full visibility, but the overall inventory levels look healthy without any evident major issues.

I just wanted to touch on the small cell commentary. You've advertised but it seems to get pushed out. What gives you confidence that it’s picking up? What are you hearing from customers? How does your content compare versus traditional wireless infrastructure?

We're getting orders; that's how we know the small cell is starting to deploy. It’s more than just commentary now as we're receiving physical orders and forecasts. The content is good and reasonably similar to the macro side on a per-radio basis, except that a macro base station could have 16, 24 channels while a small cell usually has one channel. The idea is there'll be significantly more deployed in a given area to make up for it in volume.

The small cell ramp-up is beginning to happen now but will hit a different phase in the next year or two. Our business is still pretty much dominated by macrocell right now. The channel ASP per channel is about the same whether it's small or macrocell.

Yes, I'd just add that we had a record quarter in our software-defined integrated transceiver platforms, driven by the small cells deployments happening particularly in China.

I just had one last follow-up, and this is on automotive. Instead of relative growth rates last year, can you talk about dollar content especially with the Linear acquisition?

We have a huge range of ASPs per car, given the type of technology deployed. The content will depend on the type of car and brand. It’s challenging to quantify, but we get more diversification in ASP coverage virtually in every car that we supply technology to.

We estimated that at the low end, we’d get to about $55 per car and on the high end around $500. Adding Linear should increase our content by about $100 from a SAM perspective. While we don’t win all that business at every car, it remains quite strong.

Great call, a great quarter. Hopefully, we'll talk to you again soon. That was our last question. Thanks for joining the call this morning.

Thank you.