Good morning, and welcome to the Analog Devices Third Quarter Fiscal Year 2018 Earnings Conference Call, which is being audio webcast via telephone and over the web. I'd like to now introduce your host for today's call, Mr. Michael Lucarelli, Director of Investor Relations. Sir, the floor is yours.

Thank you, Jennifer, and good morning, everybody. Thanks for joining our third quarter 2018 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 relating 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, include 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 in 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 comments today about ADI's third quarter financial results will also include non-GAAP financial measures which exclude special items. When comparing our third quarter results to our historical performance, special items are also excluded from the prior quarter and year-over-year results. 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. Okay. With that, I'll turn it over to ADI's CEO, Vincent Roche. Vince?

Thanks, Mike, and good morning to everyone. Analog Devices, well, we had an outstanding fiscal third quarter. Our performance demonstrates the disciplined execution of our strategy as we continue to deliver value for our customers, helping them meet their evolving needs in this dynamic market environment. It also reflects our ability to deliver strong results for our shareholders while investing in growth opportunities to expand market share, continuously innovate and strengthen our position for the long term. In the quarter, revenues came in above the high end of our guided range. Our growth was once again driven by continued strength in our B2B markets, especially in the industrial and communication sectors. These strong results were supported by yet another record quarter from our Linear Tech franchise. Operating margins expanded meaningfully compared to last year and non-GAAP EPS increased over 20% year-over-year and came in above the high end of our guidance. We also delivered very strong free cash flow, generating $2.2 billion in free cash flow on a trailing 12-month basis, translating to approximately 36% free cash flow margin. ADI's cash-generating capabilities enabled us to achieve our 2x leverage ratio goal 3 quarters ahead of plan, and we are pleased to announce that we have reinstated our share repurchase program. And given the long-term prospects of this business, our board has authorized an additional $2 billion in share repurchases. Now before Prashanth goes deeper into our financial performance, I'd like to continue the discussion around key market trends that are shaping our industry and the steps that ADI is taking to seize these opportunities. On the last earnings call, I spoke about the transition to 5G for wireless communications and what it means for ADI. Today, I'd like to focus on Industry 4.0, which is driving the next evolution of…

Thank you, Vince. Good morning, everyone, and let me add my welcome to our Q3 2018 earnings call. With the exception of non-op 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. As Vince mentioned, we delivered another record-setting quarter. We had 8% revenue growth, 20% higher earnings per share, free cash flow margins at 36%. But before I get into the details of the income statement, let me cover the end markets. Our B2B revenue increased 13% year-over-year, led by double-digit growth in the industrial and communications markets. The industrial end market represented 50% of sales in the quarter and increased in the low double digits year-over-year. Growth in this market continues to be broad based with nearly all applications and geographies increasing double digits compared to the year-ago quarter. As Vince highlighted, the factory automation market is undergoing changes not seen in decades, and customers are looking to ADI as the trusted partner to provide next-generation solutions to transform their industry and increase productivity. In the communications market, which represented 21% of sales in the third quarter, sales into both wireless and wired applications increased at a double-digit rate compared to the same period last year. Growth in our wireless business accelerated as the market continues to densify their 4G networks, accelerate small cell deployments and begin the transition to 5G massive MIMO. This better market environment combined with our strong position across carriers with our high performance mixed signal and RF portfolio positions our comms business for continued growth and outperformance. Our automotive business represented 16% of sales in the quarter. And in line with our commentary last quarter, sales increased at a mid-single-digit rate compared to a year ago, with…

Thanks, Prashanth. Okay. Let's get to the Q&A session. [Operator Instructions] Operator, can we have our first question, please?

[Operator Instructions] Our first question comes from Craig Hettenbach with Morgan Stanley.

Can you hear me now?

We hear you fine, Craig. Yes.

Perfect. Just a question on B2B. Understanding it's double digits in aggregate, there have been some moving pieces between segments, particularly kind of autos and comms. So any color as you look into the October quarter? Just a little bit more granular between the comm business, industrial and autos for the October quarter?

Yes. Well, look, Craig, B2B remains very strong. We've had a couple of stellar years of growth and we remain in a strong zone here. The growth has been led primarily by industrial and comms. And that's, as you know, 70% of our business today. So I'd say at this point, inventory is in very good shape, well managed on our balance sheets, it's in good shape in the channel and I'd say lead times are stable as well. And our overall guidance implies, as Prashanth said, our second -- our seventh consecutive double-digit year-over-year growth in B2B. So I think we said clearly that we see pockets of slowing growth in industrial. It's, I think, over the foreseeable future, industrial will perform in the 2x to 3x GDP area, probably at the higher end of that. Clearly, comms is -- ADI's position in 4G systems is good and carriers are spending more money in 4G, and we're beginning to see as well the early stages of deployment in 5G. So given the portfolio we have, the penetration we have at the key customers in wireless communications infrastructure, I think we're poised to see some stellar growth in the wireless comms side of the business. Also, there's a significant upgrade cycle taking place in the kind of the backhaul, the optical backhaul. So I foresee see that, again, given the strength of our penetration and the product portfolio that we have, we'll see some decent growth there, too. We've talked about automotive many times. My sense is that, that will continue to perform in the kind of the mid-single-digit growth level and so it's, I'd say, moderate but a very, very important part of what we're doing.

Your next question is from Ambrish Srivastava with BMO.

I just wanted to focus on the gross margin side. I get the mix change, consumer was stronger, at least kind of what -- versus what we were modeling, so it came in a little bit lighter versus what you had guided to, Prashanth. But if you look at the guide, that seems a little bit lighter as well. So can you just help us understand the puts and takes on gross margin, please?

Absolutely, Ambrish. Thanks for the question. So recall that our gross margin model is to be above 70%, which is industry-leading, and we're above that goal for the third quarter and the fourth quarter. But you're right, margins were slightly lower. The upside driven by communications and consumer and the result was our industrial mix declined to 50% or about 200 bps from where we were at second quarter levels. And then as we look to the fourth quarter, very similar to what Vince just told Craig, our strongest growth is going to come from comms and automotive. So that mix in the businesses is driving a little bit of that shift in gross margin, but still well above our model. And I will remind everyone that we do have about another $100 million of cost synergies, which should start layering in towards the beginning of 2021, late 2020, so we still expect to be able to continue to drive gross margins up as the operations team shuts down the facility in Singapore and in California. And then, overall, our focus is on expanding op margins. So as long as we can keep driving our revenue faster than our operating expenses, we'll be able to continue to drive the profitability for this business. Thanks for the question, Ambrish.

Yes. Just one quick follow-up to that. Prashanth was talking about the fastest growth, here's to -- sequentially, on a year-over-year basis, the strongest growers were once again the industrial and communications, which both grow in the double digits.

Your next question comes from John Pitzer with Crédit Suisse.

My question is just a little bit on the consumer side. If I back into kind of using the B2B guidance for Q4 to be up kind of low double digits, you kind of back into the consumer number, which puts consumer down about 20% for the full year, which is kind of at the high end of the range of the down 20 to 30 that you guys have been talking about at the Analyst Day -- the low end of the range, sorry. I'm just kind of curious, does that now reflect the new base off of which you guys can grow that consumer business? Or were there some things that happened this year that means that as we move into FY '19, you might still have some headwinds to work through in that consumer business with that one large customer?

Yes. So I think what you've implied is just about right, John. At this point, it's very, very hard to say what will happen next year. So we've got a good read on what the number will be this year in terms of the decline in the portable business. It's very hard to tell what '19 will look like quite yet, but it's a fast cycle business and we win designs and you can lose designs as well in a very, very short period of time. But I would say to directly answer your question, as it stands today, the consumer business hasn't yet troughed in '18, so we'll see some further decline in the portable part, I believe, in 2019.

Your next question comes from Vivek Arya with Bank of America Merrill Lynch.

Whilst your industrial and communication segments are doing quite well, but auto is at kind of this low to mid-single-digit growth, remains below the peer group. Can you give us a sense of what has been done so far to perhaps fix some of the issues, what needs to be done so that you can get back to the high single-digit or double-digit growth rate that a number of your competitors are growing at?

Yes. Thanks for the question. So the numbers that we've talked about are the combined legacy ADI and LTC. The legacy ADI part of the business is growing in the high single-digit area and the LT part in the low single-digits arena. So there are 2 primary components, I would say, that we're working hard to correct, particularly on the legacy LT side of things. Number one is making sure that our BMS business, the Battery Management business, gets back onto a solid growth track. And I'm very encouraged by the progress we've made there, particularly in the last 2 quarters, holding on to the sockets that we had and finding new sockets across the globe, particularly in North America and Europe in the electric powertrain. And we've also got a crop of new products coming, I think, that are very, very exciting. And also on the power side of things, we're more aggressive. We -- we're leveraging the ADI cost base where we've got fundamentally better cost structures to make sure that we take our unfair share of high-performance power sockets across the globe. So I think it's fair to say that we'll be in this mid-single-digit growth area, depending on the market, of course, for the next 1.5 years, 2 years. But somewhere in the 2020 area, I expect us to see a meaningful bend upwards in the growth curve.

Our next question is from Stacy Rasgon with Bernstein Research.

I just wanted to get back to the segment growth. Were you trying to imply that everything is actually growing? I know you give some differences in sequential growth versus year-over-year growth across the segments, but are you still implying that everything is, I guess, I would come with everything like -- are you still trying to say everything is flat to up sequentially? Or you still have some B2B segments that could be down sequentially, even driving double-digit year-over-year growth?

No. Stacy, you got it right. Everything, as we move from Q3 to Q4, is up sequentially. The -- what you do see is stronger growth up sequentially. And as you know, we don't guide by segments anymore, but what you do see is stronger growth coming sequentially from comms and automotive. And that is driving some mix impact overall, which gets back to -- I think it was Ambrish's question.

I guess, my only issue, it seems to take me above your B2B growth. Although maybe you're suggesting, when you say low double digits, you're more than like 10%, I guess, is what you have to be implying with that guidance.

Correct. I think it -- if it was 10%, we would have said 10%. And low double digits, to me, means probably anywhere between 10% and 12%. That's how I think about it, Stacy.

Your next question is from Tore Svanberg with Stifel.

A question for Vince. On the industrial market, you said it's slowing. Is that just a function of getting back to the mean from some very strong year-over-year growth rates? Is it seasonality or are you seeing anything else going on in that end market?

Good question, Tore. So I think from a global standpoint, what we see is that the macro economy is mainly constructive right now. You've seen PMI and GDP remain solid across the globe, the PMIs and GDP. I've spoken with several customers and they remain optimistic as well about the future. So I'd say, in industrial business now is good. As I mentioned earlier, there have been some pockets of slower growth, I think driven by the uncertainties, primarily in the geopolitical arena and as people think through what the -- this tariff situation means for everybody, but I'd say demand is resilient. And as we have in our guidance for B2B, we've talked with double digit growth, again, here on an annual basis. So I would say, in general, the growth is getting back to a more normalized level. In our FY '17, our industrial business grew in the low 20s, low 20%. This year, it will be in the kind of mid-teens. And so what I'm implying is that given the tougher compares and given the environment right now, though demand is strong, I think we're getting to a more normalized 2x to 3x GDP growth level and probably at the higher end of that.

Our next question is from Chris Danely with Citigroup.

I guess just one sort of summary question on the end markets. So Vince, you're kind of giving us the longer-term growth of auto and industrial. How about comms? So comm looks like it's going to grow sort of in the mid-double digits this year. What do you think that should be longer term? And then maybe as just a brief follow-on, given industrial is slowing, what should that mean for gross margins over the next several quarters? Should we think of them as sort of a flattish type of trajectory?

Yes. Good questions, Chris. So at this point, I'd say given the product crop that we have and the penetration we've got and the secular trends in the wireless communications area in particular, my sense is that even though it's a very, very lumpy business when you look at it quarter-by-quarter, with 4G continuing to deploy with new architectures and 5G coming on board, my sense is that can be a double-digit kind of a 10% growth area for ADI for kind of the next 3, 4 years. That's my sense. The backhaul market, particularly the optical side of that, I think is capable of growing as well in the kind of high single-digit area. So a lot of that is driven by -- the market conditions are better. I think, in general, carriers are more optimistic and are working hard to get new technologies into market as fast as they can. But as I said, we've got a great new product crop and we have deeper and wider penetration, not to mention the fact that we're starting to see the early stages of the cross-selling of LT's power technologies with ADI's signal chain. So my sense is I feel good about that market. And right now, even though prediction is a dangerous game, my sense is that we should be able to grow that business in the kind of the low, I would say, double-digit area for the foreseeable future. And I'll turn it over to Prashanth to answer the gross margin implication question.

Thank you, Vince. So Chris, the way that I'd guide you to think about gross margins longer term is, I think, sort of flattish from where we are. We are, as you know, we're still ahead of our long-term model of 70%. Our industrial business has very rich gross margins. Our comms business has great margins, but not as strong as the industrial. And as Vince mentioned, as we see more growth in that comms business, which is what we would expect for 2019, that is going to drive a little bit of mix on the margins. So probably more to be in line with flattish to what we're expecting Q4 to be. On top of that, so I do want to remind folks, we are looking at about $100 million of cost synergies that should be modeled in for future sort -- of in the late 2020, early 2021 closing both the facilities, the one in Singapore and the one in the Bay Area in Santa -- in California.

Our next question comes from Blayne Curtis with Barclays.

This is Jerry Zhang, on for Blayne. I just had a question on the pace of buybacks. So when should we expect the share count to eventually start trending lower? And also as a follow-up, how do you think about the plan for deleveraging going forward?

Thanks, Jerry. So I guess, the way that I'd guide folks to think about the -- about our repurchase activity. I'll start with reminding everyone, we generate a lot of cash, $2 billion-plus on a trailing 12-month basis and we have one of the highest free cash flow margins in the S&P 500. About $700 million-plus of that is committed to the dividend, and as I mentioned, we're still targeting to grow that in the 5% to 10% annually as we've done for the past 14 years. So the dividend would account for, let's call it, mid- to high- 30s of our free cash flow. That leaves a fairly substantial amount of our free cash flow available both for buybacks and debt repayments. Our focus will be to be in the market every quarter as an effort to -- at a minimum, work to offset dilution. And then opportunistically, we're going to look to reduce share count over time. When you ask about leverage, I think it's a similar answer in that, at a high level, we like to keep a good bit of cash available, so $750 million to $1 billion or so on hand, and then we do have a revolving credit facility in place for about another billion. I don't think about leverage as a specific target for ADI, but more as how do we optimize the balance sheet and what do we need to do to maintain investment grade so we have the flexibility that we need. So given kind of the cash-generating capabilities of the franchise, there's probably no need for us to be operating in a net cash position. So going forward, I think you can expect us to always carry some level of debt and we'll be mindful of what is the rate environment as well as what are the other opportunities for us to invest in and use that to kind of balance where we maintain our leverage.

Our next question is from Toshiya Hari with Goldman Sachs.

I had a question on M&A. I was hoping you could talk a little bit about your appetite for further acquisitions now that Linear is integrated as part of ADI, and to the extent you do have aspirations to buy more assets down the line, if you can talk a little bit about the technologies or the conditions that you would look for in a business.

Yes. Thank you. Well, our overall capital allocation framework, as Prashanth outlined, hasn't changed very much. The long-term value of our investments, both organic as well as inorganic, will continue to drive the long-term profitable growth trajectory for ADI. Our approach to acquisitions has been and will continue to be very disciplined. And at a very high level, our strategy is really focused on acquiring assets that improve our competitive moat, the breadth and depth of our competitive moat from an innovation standpoint. So our goal, really, is to acquire technologies and engineering capabilities that will enhance us, make our portfolio more complete to meet the demands of the markets and customers in the future, and basically increase our overall ability to deliver increasing value to our customers. That's the path we're on and that's the path we'll continue to be on. And you know, I'm not going to talk about specific targets, we've got a successful track record. And what we're looking at -- we're always looking, but our standards are very, very high. So this was the case when we acquired Hittite and Linear, LTC and also the myriad smaller things we've done over the last 3 or 4 years. So I'm very pleased with where we are now in terms of our overall portfolio, but we're always on the look as the markets evolve and customers' needs evolve. So hopefully, that gives you at least a philosophical view of how we think about M&A.

And our final question comes from William Stein with SunTrust.

My question is about revenue synergies. Can you update us, as it relates to revenue synergies for the Hittite acquisition, which is clearly a few years in the rearview mirror, but I think you're starting to see revenue synergies kick in there and what you anticipate with regard to the same issue with Linear.

Yes. Good question. And in as much as Hittite can give an indication of what's possible with regard to LT, we've more than doubled. When we took Hittite on board, we've more than doubled the growth rate and we've been able to scale Hittite across a broader range of customers, bring a much more sophisticated manufacturing and quality assurance capability to the portfolio. So we've more than doubled the growth rate of Hittite. And off a $270 million-ish starting revenue point, you can back out what those numbers are. We're in the early stages. It's taken us basically, I'd say, 3 years to get to the point with Hittite, where we're able to accelerate the conversion of the pipeline. It takes a while to build it, it takes a while to convert it, just given the latencies in the various markets that we attack. I've said before that with LT, we are looking to make sure that for every dollar of mixed signal opportunity that ADI has, it's $4.5 billion-ish today, at today's kind of revenue levels, that legacy LT's power should be a one-for-one match. So we're seeing a huge opportunity. We're excited by the areas that we're starting to win. We're in early production stage, for example, in communications and automotive sectors, which we felt would be the 2 most obvious places to get revenue synergy in the shorter term. So my sense is, again, getting to a doubling of the overall LT legacy growth rate in a period of 3 to 4 years is a reasonable expectation.

Okay. Thanks, everyone, for joining us. Thank you, Will. A copy of the transcript will be available on our website, and all available reconciliations and any additional information can also be found at the Quarterly Results section of our Investor Relations site at investor.analog.com. Thanks again for joining us and your continued interest in ADI.

This concludes today's Analog Devices conference call. You may now disconnect.