Analog Devices Inc (ADI) — Q2 2017 Earnings Call Transcript

All right, good morning, and thanks, Jennifer. Good morning, everybody. Thank you for joining the Analog Devices Second Quarter 2017 Earnings Conference Call. So let's get through our disclosures. 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-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. Our commentary about ADI's second quarter financial results is adjusted for special items. When comparing our second quarter results to our historical performance, special items are also adjusted in the prior quarter and year-over-year results. Available reconciliations of these non-GAAP measures to their most directly comparable GAAP measures and additional information about our non-GAAP measures are included in today's earnings release and on our web schedules, which we've posted under the quarterly results section at investor.analog.com. As many of you know, we've completed the Linear Tech acquisition about halfway through our fiscal second quarter. And so we've included reconciliations in our Investor page that provide a greater level of detail into our stand-alone and combined results for the quarter. But at a high level, I'll say that Linear contributed $208 million to our non-GAAP second quarter revenue. This number includes $60 million of purchase accounting adjustments that were made for U.S. GAAP purposes and relate to Linear Tech inventory that was in the distribution channel in North America and Japan when we closed the acquisition. At the end of the second quarter, there remains an additional $30 million of Linear inventory in the distribution channel, which we expect will be sold in its entirety in the third quarter. We've included this adjustment in our non-GAAP revenue expectations for the third quarter and no such adjustments are anticipated starting in the fourth quarter. And then the last point I'll make, and it's information you should be mindful of, is that the first quarter of our fiscal 2018 will be a 14-week quarter. Okay. So with all that behind us, about to get the show on the road. I'll turn it over to ADI CEO Vincent Roche. Vince's comments on the second quarter are for stand-alone ADI unless he specifies otherwise. And our business outlook for the third fiscal quarter relates to the combined company. Okay. Vince, all yours.

Thank you very much, Ali. Good morning, everyone. Well, it's been a very busy period for ADI, and I'm pleased to share our results with you. Not only were our second quarter financial results stellar, but we completed the acquisition of Linear Tech in March, and our integration work is going very well. So let's start with our financial results for the second quarter. ADI's stand-alone revenue came in at $1 billion, a 2% sequential increase and a 28% increase over the prior year. These results were above our revised guidance on broad-based strength, and we continue to see signs of a good business environment, particularly in the industrial market. Gross margins expanded to 67.6%, which was above the high end of our guidance and the combination of higher sales, higher gross margins and tight control over operating expenses helped expand operating margins to a robust 36% of sales. In addition free cash flow margins, as a combined company, were also strong at 39% of revenue in the second quarter. As Ali mentioned, Linear Tech was part of ADI for about half the quarter and contributed $208 million in sales on a non-GAAP basis. And we are looking forward to a full quarter's contribution in our third quarter. Now let me give you some details of our performance by end market during the quarter. Note that my remarks relate only to stand-alone ADI. The industrial market at 46% of sales grew 15% sequentially in the seasonally strong second quarter and continued its year-over-year growth trajectory, increasing 20% over the prior year. Sequential revenue growth was broad-based across all industrial sectors and indeed regions. While business conditions are certainly more positive than they were at this point last year, our success is also the result of smart R&D investments across diverse industrial applications within factory automation, instrumentation, aerospace and defense, and health care. Over several decades, ADI has carved out a leadership position in high-performance signal processing, serving our tens of thousands of industrial customers where applications demand the highest levels of performance both in terms of signal chain and in terms of power optimization. In the near term, our industrial customers are excited to gain access to the highly complementary portfolios of ADI and Linear Tech and are even more excited at the future value-creation opportunities made possible by our combination. The automotive market represented 15% of our sales in the second quarter and grew 8% sequentially and 9% over the prior year. Both sequential and year-over-year growth was broad-based across all automotive application areas and was strongest in safety and ADAS applications, while powertrain revenue increased but at a slower pace. We supply thousands of products into dozens of automotive subapplications and are gaining more dollar content as we further automate and electrify. The combination with LT dramatically strengthens our technology offerings in this market and expands additional dollar content opportunities across our very complementary customer base. The communications infrastructure market, at 18% of sales, grew 5% sequentially and 4% over the prior year. Sequential revenue growth in this market was led by wireless infrastructure applications where we're making very good progress with our RF and microwave and high-speed signal processing and integrated transceiver solutions. While we are, of course, only in the very early stages of 5G cellular infrastructure deployment, we believe that our optimized radio signal processing and power management solutions will be a very key driver of growth as channel counts increase and customers move to phased array antennas to make the most efficient use of available spectrum with the highest reliability and performance. Of course, the wireless infrastructure market is one where Linear largely didn't play, and thus, this market represents an opportunity to drive revenue synergies in the medium term. On a year-over-year basis, communications infrastructure growth was led by the wireline sector where ADI's customers are benefiting from our precision clocking, timing and control technologies in 100 gig and beyond optical networking applications. And finally, consumer market revenues at 21% of sales decreased 24% sequentially as prosumer applications revenue increased and portable applications revenue came in better than planned. Compared to the prior year, both prosumer and portable applications revenue increased. So while our combined financial results were excellent, our near and long-term outlooks are equally bright. During the quarter, we completed the acquisition of Linear Tech, creating the high-performance analog market leader. As we said from the beginning, we're taking a best-of-both approach, combining the best from ADI and LTC to come up with a new operating system to drive long-term profitable growth for our combined company, and I'm very pleased with the progress we've already made. We're optimizing processes across our selling, new product development, manufacturing and operations activities. On the sales side, the integration of our two sales forces has brought with it a tremendous degree of excitement, and we've already identified many sales synergy opportunities. On the engineering side, our teams have come together at remarkable speed and have begun identifying product roadmap combinations that we expect, over the long term, will accelerate our growth. On the manufacturing side, our teams have been focused on ensuring that we meet the upside demand and continue to deliver the highest quality products to our customers. Overall our $150 million cost synergy target within 18 months of the acquisition is firmly on track. To give you some background, during the integration planning phase, the vast majority of actions needed to realize the synergy target were identified. And while many of the related actions have already been taken, we're only in the early stages of seeing the benefits of those synergies in our P&L. In addition, we expect non-GAAP EPS accretion in our first full quarter as a combined company to be 15%, and we expect earnings accretion to accelerate into fiscal 2018 as we begin to more fully realize the synergies from the transaction. So with that, I'd like to turn the call over to Ali for details of our financial performance in the second quarter.

Great. Thanks, Vince. Good morning, everybody. Since the acquisition of Linear Tech occurred about halfway through our second quarter, Linear Tech's contributions to ADI's results were limited to approximately 7 weeks, and my prepared remarks will exclude Linear's results and other special items unless I specify otherwise. Note that a schedule reconciling our stand-alone and combined performance can be found on our Investor page at investor.analog.com and a reconciliation of our combined GAAP performance to our combined non-GAAP performance can be found in schedules E and F of today's earnings release. So revenue in the second quarter increased to $1 billion, growing 2% sequentially and 28% over the prior year and was above our revised guidance. Sequential revenue growth was led by our B2B markets of industrial, automotive, and communications infrastructure, which, in the aggregate, grew 11% sequentially and, importantly, 14% over the prior year. Gross margins in the second quarter were 67.6%, up 150 basis points from the 66.1% we achieved in the prior quarter, primarily the result of higher utilization rates. Days of inventory increased 3 days to 104 days and dollars of inventory increased $12 million sequentially as we increased production to match strong demand. Deferred revenue for shipments into distribution increased 6% sequentially and weeks of inventory in distribution were at 7 weeks, which was consistent with the prior quarter. Operating expense of $318 million increased 4% sequentially due to the natural lift from higher activity in the second quarter as compared to the first and higher variable compensation in the second quarter as our bonus program responded to better year-over-year revenue growth and operating profit in the quarter. As a result, operating margins of 36% of sales expanded 500 basis points compared to the prior year on strong revenue growth, higher gross margins, and prudent expense management by the team. So now for P&L line items below the operating margin line, I'll talk to results on a combined company basis, excluding special items outlined in today's release. Other expense in the second quarter was $59 million, the result of a partial quarter with the financing related to the Linear Tech acquisition in place. We expect our net interest expense to be approximately $70 million in the third quarter and approximately $60 million per quarter thereafter. Our second quarter non-GAAP tax rate was approximately 10%, and that's the rate we expect for the remaining two quarters of the year. We are also planning for a non-GAAP tax rate in 2018 to be approximately 15%, so note that'll be higher than the 10% rate this year. Our diluted share count increased in the quarter due to the equity consideration related to the acquisition. Since this is a weighted average calculation, the diluted share count in 2Q increased to 346 million shares, and we expect diluted share count in the third quarter, which will be our first full quarter as a combined company, to be approximately 375 million shares. Excluding special items, diluted earnings per share in the second quarter of 2017 was $1.03. The second quarter was also a very strong free cash flow quarter. As a combined company, we generated $475 million in free cash flow in the second quarter. And for the reported trailing 12 months, the combined company has generated $1.9 billion of free cash flow, which translates to free cash flow margins of 37%. Now this level of free cash flow generation is noteworthy for several reasons. First, it reflects the strength of our business model and our brand. Second, it means that our EBITDA generation was also very strong. And this means that we're better positioned from a leverage ratio standpoint at the current time than we had communicated to you earlier. So as a result, our net debt-to-EBITDA ratio based on reported combined company results is, in fact, approximately 3x, which is significantly lower than the 3.8x net debt to EBITDA number that we'd estimated when we announced the deal. So moving to capital additions, which in the second quarter were $47 million for the combined company and are planned to be in the range of $200 million to $220 million for the year here in 2017. During the quarter, we also paid $139 million in dividends, and earlier this week, our Board of Directors declared a quarterly cash dividend of $0.45 per outstanding share of common stock payable on June 20 to shareholders of record at the close of business on June 9. And that represents an annual dividend payment to shareholders of $1.80 per share. Okay. So with that, I'll turn it back over to Vince for our outlook for the third quarter of 2017, which again is on a combined company basis and excludes special items outlined in today's release.

Thanks, Ali. After a strong second quarter performance, we're planning for continued sequential and year-over-year revenue growth in the third quarter and for revenue to be in the range of $1.37 billion to $1.45 billion. By end market, we're planning for continued sequential revenue growth in industrial and for the communications end market to remain stable to the prior quarter. In automotive, we anticipate that seasonal trends will prevail, which would suggest a mid-single-digit sequential decline in the third quarter. In the consumer market, we're planning for modest sequential revenue growth in the third quarter. We expect gross margins to be between 69% and 70% as we keep utilization levels stable to their second quarter rates and benefit from higher industrial revenue mix. We estimate that operating expenses will be between $430 million and $440 million. Notably this translates into an operating margin range of 38% to 40% in the third quarter. Based on these estimates and excluding special items, diluted earnings per share are planned to be in the range of $1.07 to $1.21. While we continue to see good business conditions, we're always pragmatic and cautious in how we manage our business and in how we convert our precious resources into free cash flow. On this point, with the combination complete, ADI's free cash flow margin now ranks within the top 5% of the S&P 500. At our Investor Day on June 20, we'll outline our plan to drive long-term profitable growth for ADI, leveraging the customer value-creation capabilities of our innovation and business diversity and our focus on best-in-class operational efficiencies to continue to drive our free cash flow to even higher levels. So with that, we're ready now to take your questions.

All right. Thanks, Vince. So before we get to the Q&A session, just a couple of quick housekeeping items for me. So note that we'll be hosting an Investor Day on June 20. It's accessible via live webcast. I invite you all to tune in on June 20 to hear more about our long-term strategy and the new financial model for the company. And so let's get to the Q&A session. Operator Instructions. So operator, can we have our first question, please?

I have a medium-term question for you, Ali. Could you help us understand the consumer business over the next 6 to 18 months? Additionally, I have a follow-up for Vince.

Thank you, Ambrish. Our strategy in the consumer sector mirrors our approach in all our markets. We aim to address significant challenges faced by our customers, creating substantial value, which in turn generates considerable free cash flow for ADI. The primary distinction in the consumer segment is that product life cycles are generally shorter. However, our strategy remains consistent across all markets. Over recent years, our consumer business has seen healthy growth and has contributed significant free cash flow. We have also diversified our consumer position with our major clients and explored new growth opportunities that will bolster long-term revenue and free cash flow. That said, it is important to recognize that the consumer market experiences shorter life cycles. Consequently, there are times when older designs phase out before new ones are introduced. I believe we may currently be in such a phase. I foresee our B2B markets increasing as a proportion of our revenue as we progress into the latter half of 2017, with this trend continuing into 2018. Additionally, it is worth noting that we handle a complex array of portfolios and businesses, each with unique life cycles, growth profiles, and profitability. However, as long as ADI remains focused on solving challenging customer problems and generating free cash flow while meeting our performance targets, we will continue to thrive. Ultimately, this is how we measure our success. As Vince mentioned earlier, we are now among the top 5% of S&P 500 free cash flow generators, and our aim is to enhance that position even further.

First clarification, in terms of the revenue guide, was that combined or did that exclude old Linear? And then, I guess, as my main question, just a follow-up on Ambrish's question around consumer. Is that a business looking into calendar '17 and '18 that can grow given that you have brought on diversification increase to customer? Or is that something that we should be thinking about declining over the next 1, 2 years?

Thank you for your questions. Regarding the revenue, we provided guidance for the combined company, which ranges from $1.37 billion to $1.45 billion, with a midpoint of $1.41 billion. Looking at the end markets, we anticipate that the industrial market, which performed well in the second quarter, will continue to show strength in the third quarter, with growth expected in the low to mid-single digits sequentially. This is better than typical seasonality. On the other hand, we predict automotive will experience a seasonal decline in the mid-single digits sequentially. The communications sector is expected to remain stable, while we foresee modest sequential growth in the consumer market compared to the second quarter. Vince, would you like to address the question regarding consumer growth expectations for 2017 and 2018?

Yes, I think, as Ali said, we experienced fundamentally shorter life cycles in the consumer market. And we've been working very, very hard over the last couple of years to diversify our product base and our customer base and the application base within consumer, and we're making good progress at that. I think as we look into the third quarter, as Ali said, we're seeing modest sequential revenue growth but nonetheless below what we would consider to be seasonal norms. So we're probably in a slower growth environment in the consumer business for the near term here.

And I'd say, C.J., if I could just add 2 points. One is we do expect as a result, our B2B markets to expand as a percentage of total revenue. And I think as you look into 2018, the accretion from the Linear Tech deal is very strong here in the third quarter, about 15%. And given some of the synergies that we've talked about, we expect that EPS accretion to accelerate into 2018, and I think that would be a very strong result.

Given the stronger demand in the industrial sector and the positive outlook for ongoing growth, are you experiencing any tightness in components or longer lead times? I know some of your competitors have mentioned experiencing tightness. It seems like there's still potential for you to increase utilization, but I would like to hear your perspective on the supply situation.

Yes, that's a good question, Harlan, one we consider frequently. I can tell you that we're delivering the majority of our products within our stated lead times of 4 to 6 weeks, which has remained consistent over the past several quarters. At ADI, we are very focused on providing excellent customer service and support, and a key part of that is delivering products when we promise. Consequently, we aim to keep our lead times short, with most products shipped within 4 to 6 weeks. Additionally, we currently have 3.5 months' worth of inventory on our balance sheet, which is a reasonable amount to meet customer demand. It's also worth noting that in 2016, we significantly reduced our utilization rates to manage our days of inventory and mitigate impacts on gross margins by improving our cost structure. Looking ahead to 2017 and 2018, investors should expect to see benefits from this strategy. To reiterate on lead times, the majority of our deliveries are still within 4 to 6 weeks, and we are maintaining high service levels for our customers. Do you have a follow-up?

Question for Vince. I just want to follow up on your comments around automotive with Linear Tech. And more specifically, can you talk about how expansive your opportunity set is? If there's any examples of things that you think they will help you expand the content within automotive?

Yes. Automotive represents a continuing opportunity for increased content for both LTC and ADI, making it a significant growth market for the merged companies. We previously discussed ADI's strengths in emerging applications, such as 77 gigahertz radar, LIDAR, and infotainment through our A2B technology. We're also integrating new technologies into the powertrain, including rotational and linear sensing magnetic devices, and as the powertrain transitions to electrification, we're implementing our battery management technologies as well. Both LTC and ADI bring complementary capabilities, especially as we're enhancing ADI signal chains with LTC power management capabilities. This combination allows us to craft optimized solutions for various subapplications within the automotive sector. There is a strong synergy between the signal chain and power chain, and this situation looks promising. Additionally, we are exploring new power management opportunities independent of signal chains, with LTC playing a crucial role in our advancements over the next few years. Merging power management with the signal chain offers significant advantages since every application we are involved with in the automotive transportation sector requires both aspects. So far, I have observed an impressive level of collaboration among the application teams and design teams, fully capitalizing on the opportunities available.

Yes, I guess, just a brief one, just on the integration. Good to hear that it's on track and kind of good start out of the gate. Just any comments in terms of culture, key people and any kind of milestones we should be aware of?

We recognize that LT is a high-quality company, and I have been actively involved in the integration process of our two companies. I'm truly impressed by the caliber of talent at LT and how swiftly both organizations are merging to create something greater than their individual parts. Currently, our focus is on harnessing the combined strengths to drive long-term profitable growth, which we believe is achievable. We are taking our time to thoughtfully navigate how to merge our leadership teams while being patient in determining what the best practices from both organizations entail. In response to your question, I believe we are in a good cultural position. Our core values regarding technology, business, and customer service align closely. We are intentionally using the differences in operational practices to build a stronger entity. Our priority is to delight our customers and take advantage of the demand. With compatible values established, we are leveraging cultural differences to enhance our combined capabilities, and the LT leadership is playing a significant role in this process. I have two senior members from LT on my team, and their contributions are felt throughout the organization at multiple levels.

I had my follow-up keyed up. For some reason, I got dropped off. I wanted to get back to the capital allocation and the free cash flow. It seems like the free cash flow generating ability might be higher than at least what our models were suggesting. So could you please remind us just in terms of capital allocation and the timing for the paydown? Obviously, the leverage ratio was lower than what you had communicated and what it was at the deal close. So any light on that would be very helpful.

I'll save the main takeaway for next month's Analyst Day presentation as we want to keep some information in reserve for that. However, since we announced the acquisition, we've established a target of 3.8 times net debt to EBITDA. In typical ADI fashion, we set ambitious targets and execute vigorously against them. Part of our lower leverage ratio reflects our mindset at ADI; we are committed to aggressively achieving our targets. Additionally, better business conditions have led to increased cash flow, alongside our strong focus on operational efficiencies, which has also contributed to improved cash flow. The good news regarding our leverage is that we are ahead of schedule on our deleveraging plan, targeting a two times net debt to EBITDA ratio, and we are likely to achieve that sooner than anticipated. Once we reach that target, we have indicated our intention to resume the share buyback program. In the meantime, the dividend remains a fundamental aspect of our capital allocation strategy. Lastly, to illustrate that we are ahead of plan, after the quarter ended, we paid down $200 million on our $5 billion term loan balance. We are certainly in a strong position on this front.

So the industrial market is growing very strongly. I believe you mentioned 20% year-over-year. How much of that is the market coming back versus perhaps more electronic content or even some share gains?

We're recovering from a relatively weak environment last year, so the comparison is easier. Currently, growth is broad-based across all industrial sectors and geographies, reflecting a better business environment overall. Our customers are guiding for low to high single-digit growth in 2017. A few years ago, we strategically shifted our R&D focus toward B2B applications, which has significantly benefited the industrial sector. Given the cycles in this sector, we're starting to see our products contribute meaningfully across factory and process automation, aerospace and defense, and the instrumentation ATE business. Overall, the business environment has improved, and we're also gaining market share due to our new product investments over the past several years.

Yes. Vince, you also mentioned earlier that you plan to leverage Linear Technology into the wireless infrastructure market. I was just hoping you could elaborate just a little bit more on that because, certainly, that's a market that's been weaker the last few years. But assume with 5G coming on, your plan is to leverage both entities to participate in that market.

Yes, thanks, Tore. As ADI organic, we have been progressively improving our capabilities in developing solutions for our customers, from antennas to bits, by utilizing the combined strengths of ADI and Hittite. We recognize that as customers demand more integration to effectively address noise issues in radio systems, power management will be instrumental for us. Currently, we are actively discussing the use of existing products alongside ADI solutions, particularly in the transceiver area of 5G systems, using LT's power technology. This is just the start. Looking ahead, we are excited about the potential to design new radio solutions that incorporate the advancements in power management technology from LT, which could lead to multiple generations of success in both wired and wireless sectors in the future. There is a clear synergy between the signal chain technologies that ADI has developed over the years and the power technologies that LT now offers. Our discussions with customers are ongoing regarding existing products, and we are planning the next new architectures based on the collaboration between the two companies.

I'm hoping you can expand on something you touched on earlier, the cultural differences, however, maybe they're not as great as some people perceive. But I think one of them is that Linear was known for having an intense focus on gross profit margin and perhaps that limited that business's revenue growth, and I think ADI has a more growthy sort of outlook. So I'm wondering if you can sort of highlight any initial opportunities to expand the growth rate on the Linear business.

Yes, that's a valid point. Both companies have indeed concentrated heavily on gross margin, which serves as a good indicator of the quality of innovation being produced, the pricing power we possess, and the gross margins attainable. I can say that ADI, with its purchasing power and operational focus, alongside our merger with LT, has increased our buying power. This allows us to be more adaptable in capturing market share with existing products without compromising margins, thanks to our consolidated supply chain. We do not plan to lower our standards; instead, we aim to aggressively utilize all available products and technologies to achieve profitable business growth. That’s the perspective to keep in mind.

I did. One of the issues with the integration that's always important in any of these transactions is ERP, and by the disclosure around end markets that sort of lumps the Linear Tech revenue in its own category, maybe a sign that perhaps that's going to take a bit of time to reflect their revenue across your end markets. Any guidance or commentary as to when we should see that disclosed sort of on a combined basis? And just, in general, the update on that aspect of the integration?

Yes, fair enough. I can take part of that. Look, from an ERP's perspective, and frankly from an integration perspective, we're generally keeping Linear Tech on a stand-alone basis for the first year. And then we'll converge. With regards specifically to the end market question, we actually have the data. I just didn't feel like it was that meaningful for a stub quarter, and I can certainly talk to it right now on the call. But you should expect from ADI next quarter that we have all of the disclosures by end market mapped out, and that's absolutely no issue to do. What I would tell you in the quarter, had Linear been part of ADI for a full quarter, they would have seen their industrial business grow, and they would have seen their automotive business decrease sequentially given their exposure to the powertrain market, specifically in transportation in China, which has been a weaker market. But the good news there, I'd say well is that, that market is actually pretty stable right now and that gives us a fair amount of confidence guiding into the third quarter that automotive will be pretty seasonal.

Now that Linear is included, how would you outline the expectations for the October quarter regarding combined operating expenses? Is there a possibility they could decrease again? Additionally, what can we anticipate for the revenue seasonality of the combined company for the October quarter?

Let me clarify that for you. Currently, we have no visibility into the fourth quarter, specifically for October. Without any orders, I can only reference seasonal trends. Typically, industrial performance weakens in the fourth quarter, while automotive tends to increase. Communications can fluctuate based on build and deployment activities, and consumer usually sees solid growth during this period as builds ramp up. That's about all I can share at this point given the lack of visibility into the fourth quarter. Regarding operating expenses, this quarter, ADI had expenses of $318 million, with Linear Tech contributing $62 million. I would caution about that figure, as it reflects a partial quarter and includes public company costs, which are typically around $15 million to $20 million annually. The projected operating expenses for the third quarter of $430 million to $440 million account for these synergies. Additionally, we expect more synergies to emerge, although they will largely materialize toward the end of the third quarter and into the fourth quarter. We've talked about achieving $100 million in operating expense synergies by the end of 2018. Currently, $20 million of this is included in the third quarter estimate, with another $80 million anticipated as we move into the fourth quarter.

We have engaged a search firm and are making excellent progress. I expect to have a replacement named by the end of the fiscal year, but I'm optimistic that we can announce something before then. In the meantime, I am taking an active role in the integration of LT and relying on our strong management team at ADI to manage the finance function effectively. We are well positioned to meet our targets for ongoing operations and synergies, which are on track. We will provide an update on our progress at the Investor Day in late June.

I guess, just a question on the Linear side. You've had this under your belt for a few months now. So I'm curious when it comes to revenue synergies, where are you guys more focused on to drive revenue synergies because I would imagine consumer might be the easiest place to get it or the quickest place to get it but perhaps not the most ideal one for you. So how do you think about the end markets and revenue synergies as you go forward?

I believe that different markets have their own cycles regarding uptake, design, and adoption. Each sector we operate in, including consumer, presents opportunities for ADI to leverage Linear Technology's power management for revenue growth. In the medium term, we expect to begin seeing the impact of utilizing existing products for meaningful revenue growth, which typically takes around 2 to 3 years, as we experienced with Hittite. We anticipate significant growth in automotive, and the communications sector should also experience a positive trend in the medium term. We are carefully exploring consumer opportunities since they may yield results sooner than other sectors in our portfolio. Industrial growth, on the other hand, is likely to take over three years. This outlines our approach to adopting existing products and identifying new socket opportunities and their expected impact on revenue growth.

I understand. Your consumer guide for July indicates modest sequential growth. In previous years, this quarter typically saw triple-digit growth. Do you believe the difference is due to a later product launch in that segment, changes in your content, or perhaps the OEMs feeling more comfortable with your ability to deliver these products so they're requesting them later? It appears to be a significant change compared to the last two years. Can you provide some insight into what is influencing this?

I believe we've addressed that question earlier in the call. This matter is primarily related to ADI. Our products' content is highly SKU dependent, and we anticipate a different mix this year compared to previous years. As we move into 2018, I expect our B2B markets to grow as a larger portion of our total revenue as a result.

Congratulations on your execution as you get started in the new era with Linear Tech. My question is regarding the synergies for the combined company. It's clear, Vincent, that the company's quite happy with the way the early combined work is going. The question is, does the progress on synergies thus far cause you to think differently about the linearity with which you expect to realize the $150 million in cost gains from the two companies?

No, I think when we've discussed synergies, we've made it clear that we acquired LT for its capabilities in technology, customer management, channel management, and operations to achieve long-term revenue synergy. However, I am quite pleased with the progress we are making. We actually executed many of the decisions related to the $150 million in synergies before the companies were combined. The synergies are well identified, and the actions are in place to implement them. My belief is that it will take us about a year to see the impact of the synergies on our profit and loss from a cost standpoint, and a bit longer to realize the benefits from cross-selling opportunities.

Yes, thanks for that, Ali. And I'll follow-up on end market communications. Vincent, I think you've mentioned 5G a couple of times. And it seems like relative to 4G, the bigger picture is that, that seems to be more on track or maybe pulling in a little bit earlier versus what we had seen with some of the prior interface changes. But with regard to that opportunity, when would ADI expect 5G-related infrastructure revenues to start to become a material part of its communications segment?

Yes, I think your point is well taken. I think originally, when we began talking about 5G, we were talking about it being a facet of our business in kind of 2020-plus. It now seems that we're obviously in trials right now with 5G, all the major application areas, all the major customers globally. So my own sense is that we'll begin to see, I think, a meaningful ramp in revenue in the 2019 kind of area. Maybe it's a little sooner. Maybe it's a little later, but that's my sense at this point in time that there's an aggressive pull-in at the carrier level as well as the OEMs to make faster progress in deploying 5G.

You had mentioned that you recently that you've seen the small cell business finally picking up. What's your market share in that business, which I'm assuming has been fairly small, and what type of growth are we looking? And what type of revenue contribution could we get, let's say, in the next 12 to 18 months?

Tristan, let me try and take a crack at that. I'm sure Vince would be much more eloquent than I could ever be. But in any event, I'd say on the small cell side, it's been a relatively small contributor to our growth. I guess, what we're particularly proud of are our integrated transceiver solutions that are picking up content both on macro base stations and in small cell base stations. So to be perfectly candid with you, we are pretty agnostic as to where these platforms end up. What is really important for ADI is the channel count. And so as long as you got more and more things that are connecting up, we tend to do extremely well when that happens. And so that could be a small cell. That could be a macro base station. But we're doing extremely well in the marketplace. We had another record quarter on top of a record quarter in the prior quarter in our integrated transceiver solutions that are just sucking up a lot of bill of materials and allowing us to gain share in this market. So interestingly, you saw our results this quarter. And again, it speaks to the diversity of our communications infrastructure market and our business. But our sequential revenue growth was led by wireless infrastructure, and our year-over-year growth was led by wireline infrastructure. So you can see the diversity there. The other point I'd make is with the addition of Linear Tech, our communications infrastructure business is more diversified than ever. In the past, about two-thirds of our calls business was wireless. At the current time, it's more like 50-50. So I think we have the full suite of technology, and we're pretty agnostic as to form factor. We've got the products, and I think really it's a question of, as the market percolates, we're going to do extremely well.

Yes, I think just to add a little bit of color to what Ali has said, small cell is still a small activity from a market perspective. We're very, very well positioned. And I think it will start to accelerate somewhat during the course of the next 12 to 18 months and become a more meaningful part of the overall wireless story in communications infrastructure.

Yes, if I could. And thanks for the very useful answer. It looks like your Hittite business has grown fairly significantly since the close. Could you provide some color on what's been driving that growth? Has it been share gain, new products or just distribution synergies? And the question really relates to how should we look at Linear Tech in terms of the experience that you've gained with Hittite and the revenue growth achievement that you've done with Hittite?

There were a couple of key questions to address. With Hittite, we recognized the technology was exceptionally strong. One of the major advantages from acquiring Hittite was the extensive customer and channel reach that ADI possesses, which Hittite lacked. This has allowed us to leverage that capability effectively. The product portfolio is also very robust, which has been incredibly beneficial. Over nearly three years of collaboration, we've developed innovative solutions in sectors like aerospace and defense, such as phased array antennas. These new radar systems are being adopted globally as radar technology digitizes. In instrumentation, high-frequency systems often require a combination of mixed signal and microwave technology. The automotive sector is another area where our microwave technologies have been impactful, and the merger of ADI and Hittite has proven powerful. Essentially, we had numerous products that required a new distribution channel and a complete redesign of customer systems, drawing on ADI's mixed signal processing strength and Hittite's microwave expertise. What was the second part of that question?

How would you leverage that to Linear?

So, leverage to Linear. I think the approach we have on the best of both was also true with Hittite. We tried to figure out how to be patient, understand the world-class capabilities that Hittite had in terms of people and technology. And we've taken the very same approach with LTC. LTC is obviously a world-class company as well. So just being patient, listening to create something greater than the sum of the parts, build a whole new operating system across the company for speed and simplification. That's what we did with Hittite, and that's what we're doing with LTC times five.

Thanks for the question. And we're zooming into the 11:00 hour here, so we're going to do our best to get to everybody. In case we can't, feel free to call our Investor Relations phone at (781) 461-3282. So we'll continue until 11.