Analog Devices Inc (ADI) — Q1 2018 Earnings Call Transcript

Thank you, Jennifer, and good morning, everybody. Thanks for joining our first quarter 2018 conference call. With me on the call today are ADI CEO, Vincent Roche; and ADI CFO, Prashanth Mahendra-Rajah. Anyone who missed the release can find it and related financial schedules at investor.analog.com. This conference call is being webcast live and a recording will be archived in the Investor section of our website. Now on to the disclosures. The information we're about to discuss, including our objectives and outlook, includes forward-looking statements. Actual results may differ materially from these forward-looking statements as a result of various factors, including those discussed in our earnings release and our most recent 10-Q. These forward-looking statements reflect our opinion as of the date of this call. We undertake no obligation to update these forward-looking statements in light of new information or future events. Our commentary about ADI's first quarter financial results will include non-GAAP financial measures, which exclude special items. When comparing our first quarter results to our historical performance, special items are also excluded from the prior quarter and year-over-year results. Available reconciliations of these non-GAAP measures to their most directly comparable GAAP measures and additional information about our non-GAAP measures are included in today's earnings release and on our web schedules, which we've posted under the Quarterly Results section at investor.analog.com. And lastly, I'd like to remind investors that our first quarter was a 14-week quarter. Okay. So with that, I'll turn it over to ADI CEO, Vincent Roche. Vince?

Thanks, Mike, and good morning, everyone. Well, the first quarter of fiscal '18 was another very successful quarter for ADI with momentum continuing across our business, and I'm very pleased to share our results with you now. Revenue in the first quarter came in at the high end of our guidance as strength across our B2B markets offset the expected decline in our consumer business. Our strong execution as a combined company delivered substantial growth and operating margin expansion compared to the year-ago quarter, resulting in a 50% increase year-over-year in our non-GAAP diluted earnings per share. And our combined company adjusted free cash flow margins over the trailing 12 months continues to place us in the highest tier in the S&P 500. So digging into our markets. The industrial end market consisting of a diverse, highly fragmented set of applications represented approximately 50% of sales in the quarter. Our sales into this market have been stellar, increasing an average of 8% annually over the past 5 years, outperforming GDP by 2 to 3 times. I'd like to spend some time today now providing a little insight into why we believe we've outperformed in this market and why we remain excited for the future. On a broad level, we believe we've gained market share by targeting the right applications, developing the right products and bringing our domain expertise to bear as we engage with our customers at a more system-oriented level. For example, in our instrumentation business, our cutting-edge mixed-signal RF and microwave and power solutions are enabling the most advanced test solutions for 5G data center operations and battery formation deployment for new and existing customers. The aerospace and defense sector continues to be a strong growth market for ADI as well. This business is driven largely by fleet modernization and the development and deployment of complex applications that require the highest-performing electronics, such as phased-array radar. The combination of ADI's mixed signal, Hittite’s microwave and LTC's power portfolios enables us to achieve unprecedented levels of integration across the signal chain and more than doubles our available market. Our industrial automation and process control business continues to benefit as factory floors transform to become more flexible and more automated. Customers are striving for higher productivity and a higher variety of output. In this changing landscape, our technology breadth and domain expertise are positioning us to win more of the BOM with customers worldwide. We're engaged in brownfield upgrades and greenfield installations. Looking to the future of automation and process control, also referred to as the industrial IoT, we believe that our customer engagements combined with emerging trends, such as artificial intelligence-enabled machines, sensor-to-cloud data processing, ubiquitous sensing, and true real-time connectivity, will enable consistent content expansion for ADI. For example, on the factory floor of the future, robots and cobots will increasingly require more sensing modalities such as vibration, proximity, and depth sensing as well as the highly synchronized real-time communications capabilities that we are bringing to market. These developments open the opportunity to expand our dollar content by a factor of 5. In short, we see continued momentum across our industrial applications as we move into 2018. And that, coupled with the underlying sector trends I've just described, should position us for profitable growth over the long term in this area. So turning now to the communications market. This sector represented 19% of sales in the first quarter and benefited from strong growth in wireless compared to the year-ago quarter while wired demand remained weak. Our wireless business has increased at a high single-digit rate over the trailing 12 months due to share gains from recently released products co-designed with Hittite, strong demand for our integrated transceiver solutions and our position in virtually all emerging 5G and massive MIMO trials. We remain excited about our wireless infrastructure business as we continue to grow share and increase content despite a relatively flat CapEx environment. ADI's portfolio of RF and microwave, high-speed signal processing and power management is unmatched in breadth and depth. This portfolio, combined with our deep customer focus in the bigger verticals as well as in the broad market, is fueling our success. Turning now to our automotive business. At 17% of sales, it performed better than our typical seasonality in the first quarter on strength from the infotainment and powertrain application areas. Our powertrain solutions that improve efficiency of both combustion engines and electric vehicles grew stronger than seasonal. We see this business becoming increasingly important for us, particularly as OEMs embrace broad electrification of their fleets. Our infotainment application area has grown at a high single-digit rate over the past 5 years, thanks to our market leadership in high-performance audio and video solutions that enhance the passenger experience. We see continued momentum with our innovative A2B technology, which has secured design wins at major OEMs in every geographical region and is enabling creative new audio architectures that will come to market over the next few years. So these businesses, combined with our organic and technology acquisitions for next-gen sensing technologies necessary, for example, in Level 3 and beyond safety systems for autonomous vehicles, gives me great confidence that we're well positioned to grow at our long-term model of 2 to 3 times SAAR. In our consumer business, revenue decreased as expected both sequentially and compared to a year-ago quarter and represented 16% of sales in the first quarter of the year. Before I hand the call over to Prashanth, I'd like to give you an update on our LTC integration progress. It's been nearly a year since we closed the acquisition, and we've made tremendous progress integrating and building something that we believe is greater than the sum of its parts by following a best-of-both approach. At this point, everyone in our company across the entire organization, sales, engineering operations, manufacturing, and so on is working towards a common goal of delivering long-term profitable growth. When you look at traditional measures of M&A success, our exceptional employee retention and strong financial results over the past year speak for themselves. We're on track to achieve the initial cost synergies we targeted when we announced the deal, and we continue to believe that we can realize meaningful revenue synergies over the long term given the complementarity of our customer bases and products. As a rule of thumb, we believe that for every dollar of mixed-signal content ADI sells into a system, there's at least an equal value power opportunity that ADI can now more fully address. With our sales and adjoining teams now integrated and working together, our opportunity pipeline continues to expand, giving us more confidence in converting that $1 billion-plus synergy opportunity into revenue. To wrap it up, fiscal '18 is off to a very strong start. Analog Devices' capabilities to effectively and efficiently bridge the digital and physical domains are needed more than ever as the world becomes more digital, more autonomous, and more connected. With our ability to address opportunities from sensor to cloud, DC to 100 gigahertz and beyond, and nanowatts to kilowatts, we're confident in our ability to create shareholder value for years to come. And so with that, let me hand it over to Prashanth.

Thank you, Vince. Good morning, everyone, and let me add my welcome to our fiscal 2018 first quarter earnings call. With the exception of revenue and non-operating expenses, my comments on the P&L line items will be on a non-GAAP or adjusted basis, which excludes special items outlined in today's press release. Before I get to our results for the quarter, I want to address three items: first, our recent announcement aimed at streamlining our global operations; second, the impact from the Tax Cuts and Jobs Act; and lastly, an update on our progress in deleveraging. Last month, we announced our intention to close our Hillview wafer fab and Singapore test operations. Following a careful and thoughtful analysis, we validated this decision based on the capabilities and overall strength of the world-class supply chain that we have built organically and through acquisition. It will take us about three-plus years to wind down these operations and ensure a smooth transition for our customers. Once completed, these two factory closures represent a significant portion of the additional $100 million of cost synergies we outlined at our Analyst Day in June '17. Our current quarter GAAP results include a charge of $57 million, the majority of which relates to this action and will be cash. The overall program, which will include some expenses in future periods, will have a good payback of approximately one year. Next, I want to summarize the impact of the Tax Cuts and Jobs Act on ADI with the caveat that these are our initial estimates and could change as we refine our analysis. Investors should assume that there will be no change to our previously discussed long-term non-GAAP tax rate of approximately 12%, a level which we expect to return to in fiscal '19. This comprehends the benefits of a lower statutory rate, offset by a higher rate on foreign earnings. However, our 2018 non-GAAP tax rate is forecasted to be in the range of 6% to 8% as the higher rate on our foreign earnings does not take effect until our next fiscal year. So let me take a moment to reconcile our first quarter GAAP to non-GAAP tax rate. In the first quarter of '18, our GAAP tax expense included a net charge of $47 million related to tax reform. This charge included an approximately $690 million accrual on the tax on indefinitely reinvested earnings, which was almost completely offset by approximately $640 million non-cash reduction in our deferred tax balances. We plan to pay this tax over 8 years beginning in fiscal '19, and we expect to pay approximately $60 million in each of the first 5 years and the remaining balance over the following three years. The end result from tax reform is that ADI can more optimally utilize the entirety of its cash position and continue to delever and return value to shareholders. Which brings me to my last topic: leverage. We exited our first fiscal 2018 quarter with a net debt-to-EBITDA ratio of 2.4, down from 2.6 in the prior quarter and down from 3x at the close of the LTC deal last year. Given our strong cash flow generation capabilities, the momentum across our business and the benefits associated with tax reform, we have confidence that we can reduce our debt by at least $1 billion annually, and we now expect to achieve our 2x leverage milestone exiting the fourth fiscal quarter of 2018. Once we achieve this leverage ratio, we will revisit our capital allocation strategy to ensure that we continue to optimize shareholder value. So now let's discuss the quarter. As Vince mentioned, the 14-week first quarter of 2018 was a very strong quarter for ADI. Revenue was $1.52 billion, above the midpoint of guidance and increased 54% year-over-year while declining 1% sequentially during the seasonally slower first quarter. Looking at the combined company and excluding or backing out the benefit of the 14th week, our B2B revenue increased 10% year-over-year, led by growth in the industrial market, which increased mid-teens compared to the same quarter a year ago. Gross margins of 71% came in at the upper end of guidance and increased slightly compared to the fourth quarter. Operating expenses in the first quarter were $446 million or 29% of revenue. On a 13-week basis, operating expenses declined about 5% sequentially. We've now completed the OpEx synergies outlined in our LTC deal announcement. Strong revenue growth and operating leverage delivered operating margin of 41.7%, at the upper end of guidance. Non-operating expenses in the first quarter were $66 million. We expect our non-operating expenses to be approximately $60 million in our second quarter and to decline by $2 million to $3 million per quarter in fiscal '18. Our first quarter non-GAAP tax rate was 6%. As previously discussed, we expect our non-GAAP tax rate for '18 to be in the range of 6% to 8% before increasing to the long-term expected rate of approximately 12% for fiscal '19. Non-GAAP diluted EPS for the first quarter was $1.42, and this included a benefit of $0.09 related to our lower tax rate. Excluding this benefit, our non-GAAP EPS came in at the upper end of the guided range. That wraps up the P&L, and I'll move to the balance sheet. Inventory increased 2% sequentially or $9 million, primarily as a result of our decision to keep production levels commensurate with bookings to maintain customer service levels based on the B2B demand environment. As a result, days of inventory increased to 124, and we expect days to decline over the balance of the year beginning in the second quarter. Distribution inventory was approximately 7.5 weeks, up slightly compared to the year-ago quarter but in line with our outlook. We generated free cash of $325 million in the quarter. In the trailing 12 months, adjusted free cash flow for the combined company was $1.8 billion. CapEx additions in the fourth quarter were $63 million, and we expect CapEx in fiscal '18 to run at our model of about 4% of sales. During the quarter, we paid $167 million in dividends. Our Board of Directors approved yesterday a 7% increase in the quarterly dividend to $0.48 per share, which represents an annual dividend of $1.92. So now I'll move to the outlook and expectations for the second quarter of fiscal 2018, which with the exception of revenue, are also on a non-GAAP basis and exclude items outlined in today's release. We're planning for revenue in the second quarter to be in the range of $1.43 billion to $1.51 billion, an increase of 22% compared to the year-ago quarter at the midpoint. As a reminder, the first quarter was a 14-week quarter and the second quarter is back to a normal 13-week quarter. Adjusting for this, we are planning our B2B markets, which include industrial, automotive, and communications, in the aggregate to increase at a high single-digit rate sequentially and thus represent a larger mix of business. We're planning for gross margins to be in the range of 71% to 71.5% due to a more favorable mix and as we capture the final amount of our initial tranche of COGS synergies. We expect operating expenses to be in the range of $430 million to $440 million in the second quarter. At the midpoint of this guidance, this implies a sub-30% operating expenses as a percentage of sales once again. Based on these inputs, we expect operating margins in the second quarter of '18 to be in the range of 41% to 42.5% and for diluted EPS, excluding special items, to be in the range of $1.30 to $1.44. So to summarize, we're off to a great start for the year. Industrial continues to have momentum across all our application areas. We're outperforming in communications driven by our strong position in wireless. In automotive, we're making great progress on putting the combined company on a strong growth trajectory. As Vince mentioned, the LTC integration is going very well. Our innovation pipeline is rich, and we are just getting started.

Okay. Let's move on to our Q&A session. Operator, could we have our first question, please?

A question for Vince. Just your commentary about market share gains, can you provide any specific examples there and kind of how you view where you are in that process in terms of it translating into revenue?

Yes, I believe we can discuss market share gains in several sectors. Taking the industrial sector as an example, we've previously mentioned that aerospace and defense present increasing opportunities due to system complexity. We're able to leverage the robust portfolio of Hittite Microwave technologies alongside ADI's mixed signal expertise. There is ongoing digitalization in this area, along with fleet upgrades, from which we are benefiting significantly. Similarly, in automation, our diverse offerings and the focus we've maintained over recent years in refining our R&D portfolio and restructuring our global sales force to secure our leadership position with major customers have greatly contributed to our growth. Additionally, the merger with LTC has allowed us to capitalize on the significant market overlap, enabling our sales teams to work in complementary areas. As a result, we're gaining ground with both large and small customers, possessing more comprehensive and deeper portfolios than ever before. In the communications sector, particularly in the wireless domain, we are beginning to see the advantages of integrating Hittite’s codesign products with ADI’s strengths in mixed-signal solutions for traditional macro base stations. Our integrated transceivers are establishing themselves as the benchmark for massive MIMO developments in hybrid macro small-cell systems using phased-array antennas alongside conventional ones. Our software-defined transceiver is now recognized as the standard in this sector. As trials for massive MIMO and 5G commence, we are participating in nearly all of these trials globally. These are just a few examples in the industrial and wireless communications sectors where I believe we have clear market share gains.

My first question was, can you just help us understand the deltas you had in the business segments? Just help us understand what happened as the quarter progressed in terms of the guidance that you had provided and the results that you ended up with.

Can you clarify that question, Ambrish? Are you asking sequentially how the business did in the reported results?

Yes. My question is that you had provided guidance on expectations for all the segments, but the actual results ended up being different for each segment, especially in automotive and industrials. What caused the difference between your expected results and the actual outcomes?

Yes, thank you, Ambrish. Just to remind you, we no longer provide guidance at the segment level, which is why we didn't offer that for the first quarter. We outlined some general expectations for B2B compared to consumer. Now that we have actual results, Mike can explain how each of the B2B segments performed year-over-year, and overall, they performed very well.

Yes. So Ambrish, we guided to B2B to be down mid-single digits. B2B came down 3% sequentially on a combined company basis, but I think that’s a pretty good result in the first quarter. If you look at the automotive business, it was down 2% sequentially, which is a bit better than typical seasonality. It's highlighted in his prepared comments; infotainment and powertrain application areas were stronger. Our communications business, it's tough. There's really no seasonality in that business. But I think what's important there, it grew year-over-year. And it really was led by our wireless growth, which was up double digits year-over-year. Industrial was down about 3% sequentially on an adjusted basis or up mid-teens percent year-over-year. Once again, very good strong growth there. In consumer, we saw it as weak. It was weak. It performed as we expected. Do you have a follow-up?

Yes, I did. Sorry. My question was on the inventory side. Inventories were up. And I think if I look back at the last several years, typically in the quarter, inventories are either flat or down on a dollar basis. But you said that you built inventory. But as you go through the year, in terms of days, you expect inventories to come down. So just kind of help us understand what you are seeing and then why should inventory be trending down as we go through the year?

Yes, okay. Thanks, Ambrish. Thanks for the question. So inventory was up 2% or about $9 million quarter-over-quarter. Most of that $9 million was built for the B2B markets, and that was driven by a strategic decision we made to keep the production levels sort of commensurate with the bookings idea, bookings outlook that we had driven by: one, making sure that we can maintain the high levels of customer service that are needed; and to target our lead times sort of in that 4- to 6-week range. Everyone looks at inventory levels as an indicator or as a canary in the coal mine of what demand looks like, and I would say that all the other indicators we're following remain very green. Our book-to-bill is above parity, both with and without consumer. Lead times remain stable, and we see no change in cancellation activity. Part of that $9 million was a small but relatively immaterial amount due to an accounting policy that we harmonized between LTC and ADI. But in general, we feel very good about where we are in inventory in light of the demand we see for Q2, and we expect days to decline at a normal pace over the balance of the year.

Yes. I'll add another one, Ambrish. The internal fabs are the largest supply line for our industrial business. And what we're seeing there, of course, is the book-to-bill is positive and has been now for several quarters. As Prashanth said, we're eager to make sure that we keep our lead times at a level where we can supply the upside demand here. So I think that's worth considering when you think about why we kept our internal fabs running at a higher clip than we would normally do for the first quarter.

Could you walk us through puts and takes on free cash flow in the quarter? I know there's a bunch of stuff going on with the tax law and everything else. The number itself was a little lower than I might have expected, and I just want to see if you can give us a walk-through with all the puts and takes there. I think there's more going on there than normal this quarter.

Yes, absolutely. So free cash flow, we have the hat trick in Q1, three items that were sort of buried in there. First, we make our large annual payment to the IRS, so federal taxes were paid in the first quarter. Second, we make our once every two-year payment for the employee bonus program, and then we also make our once every two-year payment for our interest debt. So some big outlying outgoing items that hit us with some lumpiness. The way to look at cash flow, as we do, is on a trailing 12-month basis, generating $1.8 billion over the last 12 months, continuously very strong expectations on cash flow. The model has not changed. We convert a high amount of the profitability to cash, and you'll see strength there for the second quarter in the cash flow number.

Got it. For my follow-up, I had a question on the longer-term synergies around the fab closures. So you're looking at three to five years to close these factories. In the past, when you closed your own factories, it didn't take three to five years. It was more like one to two when you closed Sunnyvale or Limerick or Cambridge. Why does it take three to five years to close the Linear facilities?

Well, it tends to take three years. Given the multiple recipes that we have in our foundries and the back-end operations, it does tend to take about three years typically, and that's what I believe will be the case with the LTC Singapore and Milpitas closures as well. Our job number one is to make sure that we keep our service and quality levels high for our customers across the many thousands of customers and hundreds and hundreds of applications and, as I said, the myriad recipes that we've done. So it will take most likely three. But obviously, we're trying to push as hard as we can for the efficiencies to kick in earlier. But that's the rule of thumb, three years.

And Stacy, I would like to mention that the outcome is the two closures, but there is a lot of process movement happening across various facilities, both internal and external. So while we are discussing the overall output, the situation is much more complicated than simply closing the two operations.

I had a question on the consumer business. In the past, I think you guys talked about fiscal year '18 consumer revenues being down somewhere between 20% and 30%. I was just curious, does that range still hold? And if not, what are some of the things that are driving the potential change there?

Yes. So thank you. Well, look, our 2Q guidance would imply that consumer will be down somewhere in the region of 10% quarter-on-quarter on a 13-week basis and down about 10% on a year-over-year basis. So our expectations remain unchanged. We believe that 2018 will be down meaningfully over '17 in terms of at least the portable consumer revenue. The first half is now shaping up within the range of our expectations. We're expecting weakness in the second half on an annual basis. So the number we've given you of a 20% to 30% overall decline in the business still stands. And as I said, that's driven by our portable business; our prosumer AV, the audio/video non-portable side of things, is in good shape and continues to grow for the company.

Great. And I had a follow-up for Prashanth. I guess, it's been several months since you joined ADI. I guess, the question is what are some of the things that you've learned about the company and about the industry during this time frame that you perhaps didn't fully appreciate prior to joining the company? And what are some of the changes that you hope to drive in terms of the financial at the company going forward?

Thanks. That's a lengthy question for a detailed response, but I'll give you a quick point to consider. The link between the ADI business and the B2B markets, along with the stability of our customer base, continues to impress me. Our business is quite embedded, and we maintain close relationships with our customers across a wide range of products. Sometimes, I feel that investors may not fully recognize that our business aligns more closely with a distinct set of markets compared to other semiconductor companies in the digital sector. This is an aspect we will keep communicating to help the investor community understand the strength of our business.

This is Jeriel on behalf of Ross. Got two quick ones. First on OpEx, I see you guys guided OpEx down. I think we were expecting it to be down a little bit more. I understand it's basically guiding it back to the October range, but other than the 14- and 13-week quarter, what's the trajectory for OpEx going forward?

Right. To understand the operating expenses, starting in the second quarter, you will notice the effects of some typical factors, including our merit increases and the impact of our performance bonus metrics. The second quarter should align more closely with what we experienced in the fourth quarter if you exclude some of the irregularities from the 14th week in the first quarter, as well as the seasonal decrease in spending that typically occurs in the first quarter. Therefore, I would expect operating expenses in the second quarter to be below 30% of revenue, which we believe is a solid target as we continue to convert cash into profit. There is nothing particularly noteworthy regarding operating expense spending.

Yes. Jeriel, I'd like to add one thing there. If you look at our combined company, Linear and ADI, our guidance implies a high single-digit year-on-year growth, and the OpEx is flat over that time. That's a good result. And what that is, is we well manage our expenses and we're capturing synergies. If you look in the back half of the year, typically, I would say OpEx is up a little bit in 3Q because of merit increases, and maybe flat in the fourth quarter. I think we'll start to do even better than that this year given the synergies.

And as a follow-up, I just want to ask a question on auto growth. I think it's probably safe to say that your auto business probably undergrew the industry as a whole last year in 2017. But what gives you confidence that it can grow 2 to 3 times SAAR? Is that a falloff or a flattening in the declines in the passive safety business? Or what gives you confidence in that regard?

Yes, good question. So let me parse the business a bit for you. We have roughly a $900 million automotive business today across the combination of ADI and LT. ADI is roughly two-thirds of that; LT, one-third. The ADI portion of that business has been growing in line with the 2x to 3x SAAR target. In 2017, that part of our business grew in the high single digits, and that's also reflected in the first quarter of '18. As Mike said in one of the prior answers, our automotive business is actually better than seasonal, typically, year-over-year in the first quarter. The automotive portion is growing high single digits and the LT piece is growing in the low single digits. But we believe, given the opportunity pipe that we're seeing and the opportunity pipe that we inherited from LT, that even though the LT part of the business is growing more modestly, that over the coming couple of years, at least the power piece of that will get into the higher single-digit area at least into the model. As I mentioned in the prepared remarks, we use a rule of thumb that for every dollar of mixed signal or legacy ADI Hittite content, there's at least $1 of LT power. I will tell you as well that we're already starting to see revenue synergies on the LT side. We're winning designs for power management. As we kind of retune the business logic on the LT side and we tune the organization and the business for profitable growth, we're already beginning to see the start of synergies there. The BMS sector, well, we've said before that was a trouble spot for ADI in 2017, the battery management area. But it has stabilized and is now in the recovery phase. So we're expecting to be able to grow the battery management part of our business in double digits this year. As I said, that is at the beginning phases of what I think will be a strong recovery during the second quarter.

If you take a step back, I would say 2017 grew about low single digits year-on-year as a combined business. I think 2018 is shaping up to be better than that given our book of business.

Your industrial sales have seen remarkable growth over the past few quarters. What is your level of insight into the demand for these parts? Given this unprecedented growth, which you have attributed to strong factors like aerospace, defense, and industrial automation, what metrics do you use to ensure that this growth rate is sustainable and to assess any potential inventory or other risks that might arise?

Yes, it's a good question. I think, primarily, we as a company pay very careful attention to the end consumption. We look at sell-through in measuring the performance of our business, not what we ship into the channel, but what we sell through and what customers are consuming. So I would say first and foremost, that's the case. When you look at the backdrop, our market growth is very broad-based, and all applications and geographies are up in double digits year-over-year. So again, you look at the PMIs, they're still in the expansion phase globally. GDP is converging across the globe across all the major geographies into an expansionary phase. So also, we pay a lot of attention to what our customers are saying. I would tell you that our customers across the board and all the regions are pragmatically optimistic. Their belief, given the macro environment, the macro backdrop, the PMI situation, and the vast deployment of high-end machinery into the Asia region in particular, that '18 is going to be another good year and that we'll see momentum continue from '17, which we are experiencing right now.

Vivek, thanks for the question. I will just add, book-to-bill is looking very good. Lead times are stable and short, and we also are very conscious of what inventory in the channel is, and it does not give us concern.

Vincent, I had a quick question for you, sort of piggybacking on to what the previous question was. Doing extremely well in industrial, could you characterize the end markets that you plan? Do you think it's a function of that? Or do you think it's some other things that you guys as a company are doing to garner over-the-top growth?

Yes, it's a good question. I think we as a company retooled our strategy several years ago and primarily decided that we were focusing ADI's investments in the B2B space and pointing our sales force at the B2B area. Industrial is one of the first calls on our R&D. The crop of products, I think, we have now is the strongest that it's ever been. So we are getting more content gain across all our industrial customers, both big and small. I will tell you as well that in the areas of aerospace and defense and instrumentation, the combination with Hittite has really catalyzed content gain, and I think we're able to solve our customers' problems at a level that others can't in these areas. We're able to take a complete system, be it nanowatts to kilowatts, sensor to cloud, microwave to bits. A large part is the sheer arsenal of technologies and products that we've got and we bring to bear, the focus that we've got as a company and how we're serving our customers' needs, being able to build more complete solutions for them. We do that globally. As I mentioned earlier, the combination of the LT sales and applications force with ADI just strengthens our position and enables us to cover even more customers. I think it's a case of converging; our innovation engine is working well. Our customer engagements are stronger than they've ever been. We've been focused on making sure that we are able to gain share and build competitive advantage now for several years in the industrial area.

Thanks for the question, Harsh. I would like to conclude by saying we have a strong internal process for choosing where to invest and innovate. As Vince pointed out in his prepared remarks, this approach is paying off as we place our bets on the sectors where we see significant growth trends.

Just wanted to kind of take a step back here and look at the underlying demand trends for the business and just get a sense on how broad based it was from a geographical perspective. Macroeconomic demand trends remain relatively healthy. Maybe if you guys could just talk about the year-over-year growth trends in the different geographies.

Mike, do you want to take that?

Yes, sure. First, I'll caution you. Looking at the geography trends for us is not as useful as we base geography revenue on design-in activity. But in general, our strength is broad based. It's up double digits in every region in industrial. Our wireless business did good across the globe as well. This is definitely, I would call, a global synchronized growth scenario that we are benefiting from and really we've been doing better than, I would say, given what Vince has talked about, given our share gains, our portfolio, and where we're selecting to play. Do you have a follow-up?

Yes. On the mil/aero side, the move to phased-array radar-based systems for both civil and defense-related applications, your guys' dollar content per engagement goes up there, I think, pretty significantly. And I think that there's only one other competitor in that space. Have some of these programs started to fire? Or is it more of a 2019 driver? And then if you can just remind us of the dollar content step-up relative to prior-generation architectures.

There are numerous subapplications within the aerospace and defense sector. The recent trends and outlook for these areas appear robust, especially regarding digitalization and fleet upgrades in aerospace. We have previously discussed the shift to phased-array antenna systems that modernize the outdated analog radar systems in civil and commercial aircraft. We anticipate that the addressable market for these systems will increase significantly, from around $100,000 in the past to approximately $2 million in the future, varying based on specific architectures and deployments. The demand for these phased-array systems is quite strong, and the opportunities presented are very compelling.

Okay. Thank you all for joining us this quarter. As always, Mike is available for those of you who are unable to get through on today's Q&A session. Jennifer, we can wrap up the call.