Analog Devices Inc (ADI) — Q4 2020 Earnings Call Transcript

Thank you, Cheryl, and good morning, everybody. Thanks for joining our fourth quarter and fiscal 2020 conference call. With me on the call today are ADI's CEO, Vincent Roche; and ADI's CFO, Prashanth Mahendra-Rajah. For anyone who missed the release, you can find it and related financial schedules at investor.analog.com. Now on to disclosures. The information we're about to discuss includes forward-looking statements, including statements relating to our objectives, outlook and the proposed Maxim transaction. These forward-looking statements are subject to certain risks and uncertainties, as further described in our earnings release, our most recent 10-K and other periodic reports and materials filed with the SEC. Actual results could differ materially from these forward-looking statements as these statements reflect our expectations only as of the date of this call. We undertake no obligation to update these statements, except as required by law. Our comments today will also include non-GAAP financial measures, which exclude special items. When comparing our results to our historical performance, special items are also excluded from prior periods. 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. Okay. With that, I'll turn it over to ADI's CEO, Vincent Roche. Vince?

Thank you, Mike, and good morning to you all. I hope that you and your families are healthy and safe at this time. So 2020 represents a year of strategic progress for ADI in a very highly uncertain macroeconomic environment. Fortunately, ADI was already operating from a position of strength. Over the last decade, we've created a structurally more profitable business. We realigned our portfolio to target more durable end markets and become more diverse across customers, products and applications. During this past year and at the height of the pandemic, this business model proved quite resilient with gross and operating margins troughing at 68% and 37%, respectively, levels we previously considered peak. It's this resiliency that enables us to sustain a healthy level of investment against any economic backdrop. We’ve also not been afraid to make strategic pivots towards the most attractive investment opportunities that enhance our customer engagement and better align us to secular growth trends, such as digital healthcare. Clearly, the biggest investment decision of 2020 was our strategic combination with Maxim, which will further extend the scale and scope of our semiconductor portfolio. And I'll expand on this in a while. As I reflect on the immediate challenges of our current environment, we believe there is more ADI can do to leverage our expertise to engineer a more sustainable future and make an even more positive impact on the world. To that end, earlier this year, we published our first Corporate Responsibility Report and launched the semiconductor industry's first green bond. We also took action in the global fight against COVID-19. We prioritized production of our healthcare solutions to support customers and we're partnering with hospitals and biotech startups to develop solutions that leverage our technology. Our impact has extended beyond our own facilities and capabilities, as we've made multimillion-dollar donations through the ADI Foundation to support both global and local pandemic response efforts. Overall, I'm very proud of how we've come together. We embraced and learned from this challenging time and continue to execute at a high level to generate and capture value in the market. Now turning to our results. In the fourth quarter, revenue was $1.53 billion and adjusted EPS was $1.44, above the high end of our outlook. For the year, revenue was $5.6 billion, down mid-single digits year-over-year. This was partly driven by the economic volatility and supply chain disruptions related to the pandemic. Despite this, our cumulative B2B revenue outperformed peers for a third consecutive year. We actively managed operating expenses, delivering operating margins of 40% and adjusted EPS of $4.91. We generated approximately $1.8 billion in free cash flow in 2020. While this year's 33% free cash flow margin is just below our long-term financial model, we continue to be in the top 10% of companies in the S&P 500. So now, I'd like to provide an update on how we are shaping ADI to be even more impactful in the future. During the year, we invested more than $1 billion in R&D, with over 95% targeted at the most attractive B2B opportunities. This includes funding new product development to fortify our franchises and drive new vectors of growth. As you know, we selectively use M&A to complement these organic investments. We've taken a very significant step forward with the pending acquisition of Maxim. The numerous customers I've spoken with about our combination are delighted that we will join forces. Maxim will strengthen our leadership in the semiconductor industry, creating a more comprehensive analog mixed-signal and power portfolio and further diversifying our business across markets and applications. And at 10,000 engineers strong, the acquisition will solidify ADI as the destination for the world's best analog talent. We've also been disciplined in our approach to managing our balance sheet. Since we closed the Linear acquisition, we've cut our leverage ratio in half, increased our dividend by 40% and repurchased more than $1 billion of shares. Prashanth will provide further details on our capital allocation outlook for 2021. Shifting now to customer engagement. Our focus has been unwavering as we continued to solve our customers' toughest challenges. A key strength of ADI is our standard products portfolio. With its unparalleled breadth and depth from DC to 100 gigahertz, from nanowatts to kilowatts and from sensor to cloud, we define the edge of performance. Our portfolio is sold across customers of all sizes and provides recurring revenue for decades. But what's just as important, these standard products are the foundation upon which we build more targeted integrated solutions for higher growth vertical applications, such as 5G radio systems and automotive battery management. To that end, industries are prioritizing digitalization and connectivity more than ever and new industries are emerging, focused on the physical and cyber. In many ways, it's semiconductors that are enabling the current virtual economy and ADI, where data is born, is at the center of this evolution and well aligned with key secular growth trends. Now looking across our segments, I'd like to share some highlights with you. Starting first with industrial, this is an incredibly fragmented market with expanding needs as it transitions to Industry 4.0 and beyond. We're in a unique position to not only solve traditional challenges like precision signal processing, control and power, but also new emerging challenges like connectivity and safety. For example, our time-of-flight solution enables safer factory floors by preventing accidents between humans, robots, and cobots. Our connectivity portfolio of Deterministic Ethernet, secure microwave, RF and 5G is helping our customers create ubiquitous connectivity, merging their operational and informational technologies to unlock the true value of Industry 4.0. In healthcare, the pandemic is accelerating the market towards telemedicine and transitioning care into the home. To support this, systems are being upgraded and clinical-grade patient monitoring is extending outside of the hospital. We doubled our investment ahead of this trend, bringing to market hundreds of new products and tilting our offerings towards complete system solutions. The result, over the last five years, we've grown our customer base by over 20% and our revenues at a double-digit rate even when excluding pandemic-related demand. We’re now increasing our investment in sensing, computing and cloud, to help enable the secular shift to healthcare from anywhere. In communications, we're the market leader in 5G, a position that will deliver significant growth as 5G broadens globally in 2021 and beyond. At the same time, we view open radio access networks, or O-RAN, as a disruptive technology that enables carriers to scale and upgrade their networks more quickly and economically, an important step to help proliferate 5G into new markets. For ADI's wireless franchise, O-RAN opens up new avenues for growth. To get ahead of the market, we're further innovating our transceiver and power portfolios to shape the radio of the future. We're also forming strategic partnerships with ecosystem participants such as Intel and Marvell. And this strategy is working. Last quarter, we announced the collaboration with NEC to enable the first O-RAN installation for Rakuten Mobile. The automotive market is undergoing a revolution, with electric vehicles becoming mainstream. ADI is at the heart of this movement, with over half of the top 10 EV brands using our BMS solution. Our new wireless BMS offers the same reliability and performance of our wired solution while enhancing robustness and configurability. General Motors recently announced that they will deploy our wireless BMS across their entire Ultium battery line. Since the launch just a few months ago, interest in this groundbreaking technology is gaining momentum across the ecosystem. Looking at automotive more broadly, demand for our audio system solutions with signal processing, A2B connectivity and road noise cancellation is intensifying. Our innovative solutions are not only the highest fidelity performance technology in the market, but they also reduce weight, removing nearly 100 pounds from the average vehicle. We've also identified opportunities to attach our LTC portfolio with our A2B platform to deliver both data and power up to 50 watts. By combining all these capabilities, we are creating deeper customer relationships while increasing our SAM for audio systems. Turning to consumer now, this is a market that has had its fair share of challenges over the last few years for ADI. However, we believe that the business has bottomed in 2020. Recent design wins across a diverse customer base for new and emerging applications like hearables, wearables, high-end audio and video solutions put consumer on a multi-year growth trajectory. So in closing, this was clearly an unprecedented year for us all. We are optimistic that a broad-based recovery is underway, but acknowledge that the recovery remains dependent on the economic impacts of the pandemic. With that said, I'm encouraged by our momentum and we expect 2021 to be a growth year for the company. We've seen an improvement across nearly all of our end markets and our portfolio is strategically aligned with favorable secular growth trends, a position that gets only stronger with Maxim. In my 30-plus years at ADI, I've never been more confident about our prospects than I am today. And so with that, I'm going to turn it over to Prashanth, who will take us through the financial details.

Thank you, Vince. Good morning, everyone. Let me add my welcome to our year-end earnings call. As usual, except for revenue and non-op expenses, my comments on the P&L and our outlook will be on a non-GAAP or adjusted basis, which exclude special items outlined in today's press release. Let me start with a brief recap of 2020. The heightened uncertainty and significant disruption due to the pandemic certainly created a very volatile year. Revenue of $5.6 billion was down 6% year-over-year. However, we saw sequential improvement throughout the year and our revenue was up 14% in the second half compared to the first. Gross margins finished at 69%, down slightly year-over-year, but we enter 2021 within our long-term financial model. Operating margins landed at 40%, as we prudently managed our discretionary spending. All told, full-year adjusted EPS was $4.91. Now turning to the fourth quarter. Revenue of $1.53 billion was up 5% sequentially, marking the third consecutive quarter of growth. This exceeded the high-end of our outlook, driven mainly by stronger-than-anticipated growth in automotive. And if we look at the individual segments, in the fourth quarter, industrial, which represented 53% of revenue, was up 5% sequentially and up 9% year-over-year. We saw growth across nearly all our major applications, notably automation, which makes up approximately 20% of industrial, grew for the first time in two years. For the year, industrial revenue was about flat, underscoring the diversification across customers and applications in this business. In the fourth quarter, communications, which represented 20% of revenue, was down 14% sequentially. However, the segment was up 19% year-over-year, driven by double-digit growth in both wireless and wireline. Importantly, our growth was not aided by customer pull-in activity related to geopolitical tensions. For the year, communications revenue was down 8% year-over-year. However, excluding Huawei sales that were impacted in '19 and '20 by Entity List restrictions, our revenue grew modestly, a testament to our strong positions in 5G and optical control for carrier networks and data centers. In the fourth quarter, automotive, which represented 15% of revenue, was up over 40% sequentially and up modestly year-over-year. While we exit the year with revenue above pre-pandemic levels, it was still down mid-teens for the year due to lower vehicle production. In the fourth quarter, consumer, which represented 11% of revenue, finished up 12% sequentially, down 17% year-over-year. As Vince mentioned, we believe we're positioned to grow in '21 and beyond after three years of declines. Moving on to the rest of the P&L for the fourth quarter. Gross margin was 70%, up 160 bps year-over-year. Operating expenses were $431 million, up 7% sequentially, as we reinstated merit and experienced higher variable compensation. Operating margins finished at 41.7%, up nearly 300 bps year-over-year. Non-op expense was $44 million, down both sequentially and year-over-year, driven by lower interest expense. Our tax rate was lower than usual at approximately 10% and adjusted EPS was $1.44. If we shift to the balance sheet and cash flow, inventory dollars on our balance sheet declined modestly sequentially and inventory days finished at 121 days, down from 125 days in the third quarter. Channel inventory fell slightly and remains below our seven-week to eight-week target as we saw strong sell-through trends across all geographies. We plan to return to our target inventory model as we progress through '21. In the quarter, cash flow from operations was $673 million, up 2% year-over-year. Given the pandemic, we continued to be judicious with our CapEx, spending only $30 million this quarter or 2% of revenue. We do anticipate CapEx to normalize to around 4% of revenue for 2021. For the full year, we generated over $1.8 billion of free cash flow. We returned $1.1 billion to shareholders through dividends and share buybacks, or about 80% of free cash flow after debt repayments. This was below our target, as we paused our share buyback program at the height of the pandemic and then were restricted following the Maxim announcement. As a result, our cash position increased to over $1 billion. During the quarter, we used $450 million of our cash flow to retire our 2021 notes. Total debt ended the year at approximately $5.1 billion, resulting in a leverage ratio of 1.6 on a trailing 12-month basis. Recently, we reinstated our share buyback program, which has $1.9 billion left in authorization, or approximately 4% of shares outstanding. Given our low leverage, we do not plan to reduce debt further in '21. For context, over the last three years, we've decreased our debt by approximately $3 billion. This stronger balance sheet provides us with the flexibility to improve on our 100% free cash flow return and increase shareholder value over the long term through a combination of reinvestment in the business, continued dividend increases, greater and more consistent share buybacks and targeted acquisitions. So now let's look at our first quarter outlook. Revenue is expected to be $1.5 billion, plus or minus $70 million. At the midpoint of guidance, we expect B2B revenue in the aggregate to increase high-teens year-over-year. Operating margins are expected to be approximately 40% at the midpoint, down sequentially due to higher variable compensation and annual merit. Interest expense is also expected to be down slightly sequentially. For 2021, we anticipate a tax rate between 12% and 14%. Based on these inputs, first quarter adjusted EPS is expected to be $1.30, plus or minus $0.10. I'll wrap with a brief update on our pending acquisition of Maxim. In September, we received clearance from the Federal Trade Commission in the US regarding our merger, followed by the overwhelming shareholder support of the combination from both ADI and Maxim shareholders. We also submitted initial applications for regulatory clearance in China and the EU. I'm very encouraged by our progress and we remain on track to close the acquisition in the summer of 2021. We are excited about this complementary combination, and together, we expect that we will capture additional growth in the years ahead. So with that, let me turn it back over to Mike to lead the Q&A.

Thanks, Prashanth. Let's get to our Q&A session. We ask that you limit yourself to one question in order to allow time for additional participants on the call this morning. If you have a follow-up question, please re-queue and we will take your question if time allows. With that, can we have our first question, please?

Thanks for taking my question, and congratulations on the strong execution, especially the free cash flow generation. Vince, my question is on the demand environment, both near-term and what do you sense for the next calendar year? So in the near-term, which end markets do you feel are back to normal levels, which are below trend line? Because when I look at your January outlook, up 15% or so year-on-year, obviously, against some easier comps. You're certainly starting the year on a very strong note. But just how should we think about the overall year in terms of the puts and takes for the different end markets in industrial, auto, comms and consumer? Any broad color just near-term and then for calendar 2021, I think, it would be really helpful to help kind of frame our models for your forecast? Thank you.

Sure. Thanks for your question, Vivek. I would say, clearly, as you said, overall demand is better. And I think as well, there is a very good balance between supply and demand. Inventories are, I'd say, very, very well balanced with our customers as best we can tell. Right now, we are seeing very strong trends in automotive and industrial, while we expected comms to be a little softer after a big first half of 2020. But overall, I believe 2021, I think I said in the last call is going to be a solid growth year for ADI and for the industry. My conviction has become even stronger since the last earnings call here. Let me try and unpack things a little for you. If I go through a couple of the market segments, industrial, we've clearly seen a broadening of demand. And if you look at 2020, the first half was clearly about healthcare, aerospace and defense, and automatic test equipment, with strength in those areas and that strength has persisted, I think, into the second half of the year. The second half actually saw good strength emerge in factory automation and process automation; they are more horizontal businesses for ADI. So, we believe that strength will continue into the first quarter and beyond. Automotive, as you will have seen, we had a strong upsurge there as well and the business, in fact, is now back to pre-COVID levels. Bookings continue to remain strong in that area. If I look at just the sub-segments to give you a little bit of color, electrification is strong, so are BMS solutions, where we're on the fifth generation of BMS product solutions, which are doing particularly well. Our infotainment business, which has emerged beyond high fidelity rendering of audio and video, our A2B solutions are emerging with great strength, given the pipeline that we've been building over the last several years. You will have seen no doubt as well, the active road noise cancellation solutions are riding again on top of the platform. So if I look at maybe comms a little bit here, so 2020 was strong actually across both wireless and wired. Both were up in the fourth quarter of high teens year-over-year. If we extract Huawei, where we had the restrictions, 2020 was strong across all the rest of the customers. In fact, they grew during 2020. I think 2021 will be about the performance of 5G, which is a pretty good part of the communication story. I expect it will move more global beyond China, particularly with deployments in North America. I'm glad to report as well, consumer has been on the downward trajectory for ADI for several years. But we believe now that we've reached the bottom as we had expected in 2020. Given the diversity of applications that we're now addressing, broader-based customers, we feel good about that business in both the portable as well as the more professional solutions that we serve. So hopefully, that answers your question completely, Vivek.

Thanks, Vivek.

Thank you.

We'll go to the next question.

Yes. Thank you, and congratulations on the results. Vince, I was hoping you could zoom in a little bit more on comms and on 5G. You talked about O-RAN. Obviously, ADI has a very flexible approach with the software-defined radio. I was just hoping you could talk a little bit about how that architecture plays into the role of O-RAN and just maybe some more comments on 5G generally? Thank you.

Yes. So if I look at what's happening in the business, I might take a shorter-term view than the wider perspective and address your question on O-RAN as well, Tore. What we're seeing is that in the business in general, as I said in answer to the last question there, comms for us has seen strength in both wireless and wired technologies, particularly in the wired area. We're seeing more aggressive deployments of these massive MIMO-based systems, where our channel count continues to increase, which gives ADI a lot more content for radio. I would also say that our portfolio has never been stronger given the investments we've been making over several years. Our customer share has never been higher with key OEMs far more balanced in terms of the span of technologies and products that we're supplying. It's important to remember 5G is at the early stages of multi-year, probably a decade of ramp here. I think 2021 will be characterized by the deployments of 5G more globally beyond China. I expect America to be the primary driver probably toward the second half of 2021 for 5G. We've seen a lot of interest in our technologies for O-RAN. We're working with ecosystem partners in that area. Also, the first announcement we've had publicly is about the use of our radio technologies with Rakuten Mobile in Japan through our partnership with NEC. 5G will be deployed for consumer applications and will continue rapidly over the next three years. We're also beginning to see the early stages of adoption of 5G into more critical applications like healthcare and factory automation. If you look over the long term, Tore, this will continue to be a growth market for ADI with more content. We have a stronger position with our customers and will continue to push the boundaries of technology here to enable our customers to deal with the increasing complexity and more rapid innovation cycles with our software-defined radio systems.

Thank you.

Thanks, Tore. We'll go to the next question, please.

Congratulations on solid results. Thanks for letting me ask the question. A modeling question for Prashanth. Prashanth, if you look at the quarter just reported, the October quarter, incremental op margins were perhaps lower than I would have expected. I'm assuming that's variable comp coming back into the model as you guys continue to do better on the top line. But I'd be curious as you look into the January quarter, how we should be thinking about OpEx just given how funky a year, calendar year '20 was because COVID had both some puts and some takes on the OpEx and expense line?

Yes. Thank you for the question, John. So let me handle that in two pieces. Let's talk about gross margins and then OpEx. So for the quarter just passed, 70% gross margins, we had considerable upside from automotive. We faced some mix headwinds with that explosive growth in automotive. As we think about gross margins for the coming quarter - for the first quarter, we are passing through the holiday period. So, we're going to have a little bit of continued pressure on utilization as we have some of our fabs will be shut down for the holiday period. We expect that to improve as the year progresses and we bring in the remaining $50 million of cost reductions from the shutdown of the two LTC facilities in the balance of 2021. On the OpEx side, you're exactly right. We've designed our variable comp system to act as a shock absorber, as a flywheel. In 2020 when we had a great deal of uncertainty, that operated as it should and unwound. In addition, we made a decision as a leadership team to delay implementing merit in 2020. We brought that back into place just this past quarter. So you'll see headwind from both of those decisions into the first quarter, as I've mentioned in my guide. So it's both a full quarter of merit and better variable compensation.

Thanks, John. Cheryl, we'll go to our next question.

Vince, I wanted to zoom in on the industrial business. This business has been really resilient compared to the past cycles for yourself, as well as your larger peers. So the question really is, can you just help us understand - and you gave us a number, 20%, for automation. But if you can help us understand the various segments that are contributing to how you're able to kind of navigate through what we have seen as a pretty disastrous 1Q, 2Q? With Maxim, we all understand the complementary parts or the additive parts on the automotive. Can you just help us understand how does the industrial business benefit from the Maxim business that you'll be bolting on? Thank you.

Yes. So, thanks Ambrish. First and foremost, it's still a fairly tricky time in terms of trying to predict GDP. We've come out of the year with tremendous strength. The first half of the year for ADI was about aerospace and defense, healthcare and the automatic test equipment sector as well. That strength has continued, by the way, through the second half. We're building upon that with the upsurge; the second half is the expansion of growth in factory automation, which particularly in the fourth quarter, we began to see a very, very good surge, which we expect to continue, albeit from a somewhat depressed base as economic expansion takes root, I believe, in 2021. This industrial business is more than half of the company’s revenue. The crop of products out there is stronger than ever in the history of the company. A decade ago, we decided this was really the roof of the company, and we're beginning to really see that demonstrated in our results versus our competition. We're gaining market share, and I think that's important to note. We cover more customers with more market share, with a better product portfolio. With Industry 4.0 coming on board, healthcare moving towards digitalization and telemedicine, these all bode really well for ADI for the long term. As for Maxim, industrial is primarily about precision signal processing and power management. Maxim brings a long heritage in those two areas, which we will deploy to even greater effect across the spectrum from sensor to cloud. That will bode very well for ADI. I'm excited about getting more capabilities to bring to more customers. As our customers require us to solve bigger swaths of problems, the complexity is growing in terms of their needs. The analog scale is becoming scarcer. We will bring more of that skill to bear to solve more problems in a more complete way for our customers. So, I think that's the way to think about it, Ambrish.

Thanks, Ambrish. Go to our next question, please, Cheryl.

Thank you for taking the question. Another question on the industrial side, Vince. The business is growing 9% year-on-year in October, yet over the last few years has been essentially flat. I'm curious, given that automation has shown growth for the first time in two years, what your thoughts are on the growth potential for that business segment considering some of the factors such as healthcare as well as perhaps the more tried-and-true machinery business beginning to recover? Thank you.

Yes. So if I look - thanks, C.J. If you look out over the longer term, industrial automation has been really on its way down for the last two years, two and a half years, driven by trade tensions. The pandemic crushed demand even more so in 2020. Automotive is a big consumer of sophisticated factory automation systems. That's now improving. My sense is if you think over the longer-term here, integrating the demand over a three-year, five-year period, this business can grow in the mid-to-high single digit level for ADI.

Thanks, C.J. Go to the next question, please.

Vince, I wanted to follow up on the automotive business, both in terms of your Q4 performance as well as the outlook into fiscal year '21. Just as a clarification on Q4, you guys grew 40% plus sequentially. I think you were guiding that business to be up in the low teens. So obviously, that was a very big beat in the quarter. Was that a function of higher volume across your customers and therefore, a beat across most of your customers and applications? More importantly, into fiscal year '21, for your automotive business and the potential for growth there versus the rate of recovery in the overall global automotive industry, what kind of outperformance would you expect on top of automotive production? It appears as though you guys talk about BMS and active noise cancellation, in particular, but are there any specific drivers that you're most excited about? Thank you.

So let me try and unpack that for you. In the fourth quarter, we were up 2% year-over-year. We had strength across all the applications. Even though our battery management solutions were down year-on-year, we did better than the overall market at large. Our position has gained strength with the new offerings that we have and the sheer performance that we bring that nobody else can match in terms of sensing and signal processing. Just looking at the prognostications of what electrification will do in the electric vehicle area, that's a growth trend for decades. We feel good about that given our position. Also, if you look at the fourth quarter, our signal processing platform based on DSP, our A2B technology road noise cancellation was up 70% in the year. We've spoken about it a long time, but now the revenues are really coming home to roost in that area. The automotive business for ADI usually slows down seasonally in Q1, but we believe that it will be up. The strength we've been seeing coming through in Q4 will continue into Q1 and beyond. We're enthusiastic about investment areas we've been steering toward for the last three years. I mentioned electric vehicles—battery formation to battery deployment and battery discharge. We're growing share in those key markets and continuing to innovate and create more differentiation from our competition as our customers face more challenging problems. We recently launched wireless BMS and announced a partnership with GM. That's only the beginning—it's a new growth dimension for ADI in automotive. I've talked about infotainment already—A2B and road noise cancellation. We managed to grow that business in 2020 despite the challenging environment. Also, we're still in the early innings of attaching our power franchise in automotive for critical applications we serve, and that's still ahead of us. Again, we feel optimistic about areas like safety and radar, as well as vision-based safety systems.

Good. Next question, please?

I just want to revisit your answer. On the communications side, you talked about longer-term drivers like O-RAN. I'm curious. In January, I think there is going to be a pause between Phase 1 and Phase 2 in China. Just curious on your perspective. It seems like it might be down a little bit in January. When do you think communications could see a recovery, and any perspective or timing of China coming back?

Yes. I think communications will see a sequential decline. A big reason why communications was down sequentially in Q1 is the Huawei ban. Huawei was a low single-digit customer, call it, 2%, 3% of sales. They'll be gone. That will be a headwind into our first quarter. The timing of the next run of China 5G deployment is TBD. When they do happen, it will be a great business for us, and we'll continue to grow in that market. It's very hard to call when that market will turn back on—in the first half of '21, but really unsure to pinpoint today when that's going to be due to all the geopolitical tensions. The good thing is in '21, with the transition to global 5G, North America should start ramping up, and Europe, Japan, and Korea have really started to broaden out. While China will still be the biggest market, the global deployment of 5G should show improvement year-on-year in '21. Can we go to our last question, please?

Thanks for sneaking me in. I just wanted to wrap up with a little bit of the linearity of demand. Can you just talk about the bookings that you've seen? Have any of the concerns that your customers have had in the past about supply disruptions and all those sorts of things? It seems like those have gone away, given your commentary on channel inventory. I wanted to get your book-to-bill metrics and how linearity played out through the October quarter, please?

So let me give you a couple of data points here. We started the quarter strong in August, which was up from July, and then we had a pretty normal September. Bookings remain solid so far. Book-to-bill is at parity, where we're going into the first quarter with very normal backlog coverage for our outlook. All of that is reflected in the guidance we have. I made a comment about inventory in the channel. We are below our seven-week to eight-week model and will build ourselves back into that model over the course of 2021. That should provide a little bit of a tailwind as we go through 2021.

All right. Thanks, Ross. And thanks, everyone, for joining us today this morning. A copy of the transcript will be available on our website. All available reconciliations and any additional information can also be found in the Quarterly Results section of our IR website. Thanks for joining us and your continued interest in Analog Devices. Hope everyone has a good holiday.