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Analog Devices, Inc. (NASDAQ:ADI)
Q2 2018 Earnings Conference Call
May 30, 2018, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning and welcome to the Analog Devices second 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.

Michael Lucarelli -- Director of Investor Relations 

Thank you, Jennifer. Good morning, everybody. Thanks for joining our second 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 investors section of our website. Now onto 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 at the date of this call. We undertake no obligation to undertake these forward-looking statements in light of new information for future events.

Our commentary about ADI's second quarter financial results will include non-GAAP financial measures, which excludes special items. In comparing our second 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 will be posted under the quarterly results section at investor.analog.com.

Okay? So, with that, I'll turn it over to ADI's CEO, Vincent Roche.

Vincent Roche -- President and Chief Executive Officer

Thanks, Mike, and good morning, everyone. Well, the second quarter of Fiscal 18 was remarkable for ADI. We posted non-GAAP diluted earnings per share above the high-end of our guidance and set a new high watermark in free cashflow generation and I'm pleased to share some perspective on our results with you now.

So, revenue in the second quarter came in just above the high-end of our guidance, as strength across our B2B markets, especially in the industrial and communication sectors offset the expected decline in consumer. Our results were also supported by our Linear Tech franchise, which posted a record revenue quarter.

Growth and operating margin expanded substantially compared to the year ago quarter, driving a more than 40% increase year over year in our non-GAAP diluted earnings per share. This execution resulted in record free cashflow in the quarter under combined company adjusted free cashflow margins over the trailing 12 months continue to place us in the highest tier of the S&P 500.

Now, before we go deeper into our financial performance, I'd like to take this opportunity to provide investors with a deeper perspective on some of our key technology and market trends and ADI's strategy relative to them. I've spoken before about the dawn of the third wave of information and communications technology or ICT, which is characterized by ubiquitous sensing, hyper scale and edge computing and pervasive connectivity.

In this world, digital systems increasingly rely on real world information to make mission critical decisions and the accuracy and the integrity of this information is becoming more and more important. Simultaneously, the actual challenge of identifying and extracting signals in the presence of increasing levels of noise is becoming harder.

Now, I believe that this is creating an inflection in the analog industry and it's enabling ADI to play a critical role in generating and communicating high quality information to leverage our cutting-edge innovation and solutions to tackle our customers' hardest problems, from sensor to cloud, microwave to bits, and nanobots to kilowatts.

It's our ability to sense, measure, interpret, power, and connect these two worlds that is helping to enable autonomous machines, natural human to machine interaction, and future important technologies such as virtual and augmented reality and so on.

Today, though, I'd like to talk more specifically about connectivity and 5G, which has been the subject of much news coverage lately and which represents the next big investment phase in wireless infrastructure and how we view its evolution and timing. In fact, an entirely new wireless and wireline network architecture will ultimately be needed to meet the demands for orders of magnitude increases in bandwidth-hungry areas, such as high-definition video streaming.

Although 5G will provide revolutionary capabilities, the transition to 5G will be evolutionary. We see the first phase of this evolution being the edition of massive MIMO, which will provide a significant increase to the capacity of the current 4G wireless network. The use case and benefits of massive MIMO to the carriers are real. A massive MIMO system can deliver a greater than 3X data capacity increase in the same spectrum as a current 4G bay station.

This helps to solve two large challenges for carriers -- capacity and cost. ADI is enabling these massive MIMO implementations today through our highly integrated, software-defined transceiver platform. This solution reduces the radio card area by a factor of 10 and overall remote radio head footprint by 50%, while simultaneously reducing power consumption. These are critical success factors with massive MIMO systems since they use on average the number of eight times the number of radios compared to today's systems.

Equally important, these transceivers have the flexibility to operate from 300 megahertz to 6 gigahertz as they are software programmable, giving our customers a single platform-based design that can quickly be modified to operate in any of the many different cellular bands that exist around the world.

These radios can also scale from small cells to macro bay stations to massive MIMO radios and they offer a flexible architecture capable of right-sizing the analog and digital performance needed by a customer's product family.

However, to realize the longer-term 5G ambition, further network change is needed. In order to further expand the network bandwidth, millimeter wave solutions will come into play in order to provide multi gigabyte per second wireless connectivity using phased array solutions.

In that arena, ADI is leveraging the capabilities from our Hittite acquisition. We have a very unique market position of having deep competency from antenna to bits up through millimeter waves, and our solutions and technologies are well-positioned in the current millimeter wave trials around the world. This will expand ADI's sun as it emerges.

In addition to adding massive MIMO and millimeter waves, 5G will require a complete rearchitecting of the core wireless and wireline network, including a move toward network virtualization and more edge computing. This backbone network will be required to meet the 5G vision of greater than 1 gigabyte per second download speeds, low latency, and high reliability demanded by mission critical applications, such as digital healthcare, autonomous vehicles, fully autonomous factory floors, and augmented reality systems.

This network expansion will drive a significant upgrade of the of the backhaul system, opening a new stream of opportunity for ADI's optical and point to point microwave solutions. 5G represents an enormous opportunity for ADI, as we are uniquely positioned to provide the enabling technology through our comprehensive portfolio of high-performance mixed signal, RF and microwave, and power management technologies.

The combination and integration of these innovative capabilities will allow us to create even more comprehensive and compelling signal change solutions for our customers and the opportunity to capture up to three times the bomb when compared to our 4G solutions.

Now, while we're obviously excited about the remarkable potential of 5G, the greater volume of our communications business in the next couple of years will still be 4G. Here, our business is strong and has been growing at a high single-digit rate over the trailing 12 months. Our growth has significantly outpaced industry CapEx spend, as we have seen share gains in traditional products thanks to new RF offerings resulting from the combined strength of our ADI and Hittite engineering teams. Those results have been augmented by strong adoption of our integration software-defined transceivers across macro, small cells, and massive MIMO trials.

So, in summary, we feel very confident and energized by our communications market success, which is built upon close partnerships with our customers, our domain known how, our unwavering desire to solve the toughest engineering challenges, and strategic investments in research and development, along, of course, with our acquisitions of Hittite and Linear Technology. So, looking forward, we expect to continue to outperform in the communications market and accelerate our growth as we fully address our customers' needs well into the 5G future.

Of course, 5G is just one of the many areas ADI is taking advantage of in the era of digitalization. In this ubiquitously sensed and connected world, there are many exciting new opportunities, areas such as industrial 4.0, autonomous and electric transportation, and cloud computing. And in future earnings calls, I will continue to speak to these opportunities with you and look forward to sharing how we are creating long-term value for our customers and for our shareholders.

And so, with that, I'd like to hand over to Prashanth.

Prashanth Mahendra-Rajah -- Chief Financial Officer

Thank you, Vince. Good morning, everyone, and let me add my welcome to our Fiscal 2018 second quarter 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. Revenue for the quarter was just over $1.51 billion. Above the high-end of our guidance year over year and up 7% sequentially on a 13-week basis.

Now, before I move on to the rest of the P&L, let me give you some commentary around our market performance in the quarter. Looking at the combined company, our B2B company increased 14% year over year, led by double-digit growth in the industrial and communications markets. The industrial end market represented 52% of sales in the quarter.

Growth in this market was, once again, broad-based, with nearly all applications and geographies increasing double digits compared to the year ago quarter. Momentum continues as our targeted R&D investments aimed at the underlying sector trends of automation, instrumentation, and healthcare continue to drive outperformance.

Turning to the comms market, which represented 19% of sales in the second quarter -- sales into both wireless and wired applications increased compared to the same period last year. Furthermore, our wireless business has increased at a high single-digit rate over the trailing 12 months. Our growth is due to share gains related to our complete portfolio of high-performance mixed signal, RF, and microwave, as well as the strong demand for our integrated transceiver and our position on virtually all of the 5G and massive MIMO trials.

As Vince mentioned, we expect to grow our comms revenue at a mid-single-digit rate in the backdrop of a flat CapEx environment ahead of 5G rollouts and 5G represents an enormous opportunity at ADI, as we are positioned to provide the enabling technology with our comprehensive portfolio.

Our auto business represented 16% of sales in the quarter after a better than seasonal first quarter. Second quarter sales increased at a low single-digit rate compared to the year ago quarter, with growth led by the infotainment and power train applications.

Finally, our consumer business, representing 13% of sales in the second quarter and as previously communicated, decreased compared to our year ago quarter.

Let me now move to the rest of the P&L. Gross margins of 71.3% came in around the midpoint of guidance and increased slightly compared to the first quarter on a more favorable mix. OpEx in the second quarter was $442 million or approximately 29% of revenue. Strong revenue growth combined with operational execution delivered operating margins above 42% and at the upper end of our guidance. Non-op expenses in the second quarter were $62.5 million. We expect our non-op expenses to be approximately $58 million in our third quarter and to decline by $2 million to $3 million in our fourth quarter of Fiscal 18.

Our second quarter non-GAAP tax rate was 5% as we adjusted the tax rate for the full year to 6%. Looking to the third and fourth quarters, we expect our non-GAAP tax rate will remain between 5% to 7%. There is no change to our expectation for Fiscal 2019 and we continue to expect our long-term tax rate to be approximately 12%. Non-GAAP diluted earnings per share for the second quarter came in above the high-end of guidance at $1.45 increasing over 40% year over year.

Now I'll cover the balance sheet. As we planned, inventory decrease 2% sequentially and days were 116 in the quarter, down from 124 days in the first quarter. Distribution inventory was approximately seven and half weeks, which is flat sequentially and up slightly compared to the year ago quarter.

We generated record free cash flow of approximately $665 million in the quarter with associated free cashflow margins of 44%. And in the trailing 12 months, adjusted cashflow for the combined enterprise was $1.9 billion.

During the quarter, we paid down $450 million of debt, which helped reduce our net debt to EBITDA ratio to 2.2 times, down from the 2.4 times from the prior quarter. We expect to achieve our two times leverage ratio within the next two quarters. Capital additions in the second quarter were $54 million and we expect CapEx for Fiscal 18 to run at our model of approximately 4% of sales and during the quarter, we paid $178 million in dividends with an associated quarterly cash dividend of $0.48, representing an annual dividend payment of $1.92 per outstanding share of common stock.

So, let's now turn to our outlook and expectations for the third quarter of Fiscal 18, which, with the exception of revenue, are also on a non-GAAP basis and exclude items outlined in today's release. At a high-level, we're expecting third quarter to look a lot like second quarter. We're planning for revenue in the third quarter to be in the range of $1.47 billion to $1.55 billion. At the midpoint of guidance, we expect our B2B markets of industrial, auto, and comms in the aggregate to increase approximately 10% year over year.

We're planning for gross margins to increase approximately 50 to 150 basis points compared to the year ago quarter. We expect our operating expenses to be flat to up to $10 million year over year. At the midpoint of guidance, this implies OpEx as a percentage of sales of approximately 29%. Based on these inputs, we expect operating margins in the third quarter 2018 to be in the range of 41% to 43% and for diluted earnings per share excluding special items to be in the range of $1.38 to $1.52.

So, to wrap it up, this was another terrific quarter for ADI and we set a few records along the way. Our B2B business increased double digits year over year and our strong operational execution drove gross and operating margins higher, which resulted in a record free cashflow in the quarter.

With that, I'll turn it over to Mike for our Q&A session.

Michael Lucarelli -- Director of Investor Relations 

Thanks, Prashanth. Now let's get to our Q&A session. Please limit yourself to one question. After our initial response, we'll give you the opportunity for a follow up question. Jennifer, can we have our first question, please?

Questions and Answers:

Operator

For those participating by telephone, dial in. If you have a question, please press * and the number 1 on your phone. If your question has been answered and you wish to be removed from the queue, please press the # key. If you are listening on a speakerphone, please pick up the handset when asking your question. We'll pause for just a moment to compile the Q&A roster.

Our first question comes from Tory Vonberg with Stifel.

Tory Vonberg -- Stifel, Nicolaus & Company -- Analyst

Thank you and congratulations on the strong results. First question for Vince -- you talked about participating in 5G trials. Could you elaborate a little bit on that? It sounded like you were participating in all of them out there, but if you could give some context, that would be great.

Vincent Roche -- President and Chief Executive Officer

Yeah. Thanks, Tory. Well, as I said in the prepared remarks, there are really two phases to 5G, at least from an ADI, perspective, there's the pre-millimeter phase and the millimeter phase. The pre-millimeter phase is really dominated by this massive MIMO expansion, which is really an overlay on 4G.

So, our software defined transceivers are absolutely everywhere in the systems that are being brought to market this year and next year. In fact, it's one of the fastest-growing product sectors inside ADI. So, that's been a very strong contributor to our communications business and, in fact, beyond. These transceiver technologies, because they're so flexible are usable as well in places beyond communications.

Also, the combination of Hittite and ADI from RF to bits and microwave to bits is enabling us to capture new content in pre-5G systems, but it's the combination of our massive MIMO, our Hittite ADI microwave and millimeter wave to bits technology that is enabling us to be participating in virtually all these field trials across the globe.

My sense, Tory, is the US and China will be in the kind of '19, '20 timeframe we'll be at least trialing some particular applications. China will get faster to mass market with what they call 5G, which is really 4.5G plus massive MIMO. So, I hope that explains what it is we're doing. In the run up to what will be pure 5G 2025 timeframe, where the core network gets changes with virtualization, edge computing and pure millimeter wave-type technologies spanning different frequency levels.

Michael Lucarelli -- Director of Investor Relations 

Thanks, Tory, do you have a follow-up?

Tory Vonberg -- Stifel, Nicolaus & Company -- Analyst

Yeah, just to follow up with percent -- percent with the gross margin being up year over year, is that mainly a function of mix or is there any other contributors there? Obviously, the revenues are slightly higher but is the main upside to gross margin year over year coming from mix?

Prashanth Mahendra-Rajah -- Chief Financial Officer

Sure. Well, Tory, remember that we have now completed the implementation of all of our synergies related to the acquisition of Linear. We have built into our run rate the cost synergies that we committed to at the time of the acquisition. That is contributing as well to the gross margin strength. I would also say that with volumes where they are, we're getting the benefit of strong utilization of at our internal FABs.

Tory Vonberg -- Stifel, Nicolaus & Company -- Analyst

Thank you so much.

Vincent Roche -- President and Chief Executive Officer

I'll just add that we have an additional $100 million of cost centers we talked about, so $150 million is complete and we still have another $150 on the comm.

Tory Vonberg -- Stifel, Nicolaus & Company -- Analyst

Thank you.

Michael Lucarelli -- Director of Investor Relations 

Can we have our next question please?

Operator

Our next comes from the line of John Pitzer with Credit Suisse.

John Pitzer -- Credit Suisse -- Managing Director

Yeah, good morning, guys. Can we hear me?

Prashanth Mahendra-Rajah -- Chief Financial Officer

Good morning, John. You're a little find, but good morning.

John Pitzer -- Credit Suisse -- Managing Director

Hey, Vince, really appreciate all the color on the comm decisions, but I wanted to talk about your auto business. You had really strong growth in the January quarter that decelerated pretty significantly in the April quarter, which was a little bit surprising, especially, as you said in your prepared comments, the Linear business was achieving you all-time records. I'm just kind of curious.

You have been under-growing your peers in autos, which was explainable over multiple years because of the MEMS part of your business, but that should be a fairly small part of the business now. I'm, just curious as to what's holding back growth in that market and then how you feel your long-term position is in the auto space.

Vincent Roche -- President and Chief Executive Officer

Yeah. Thanks, John. Our long-term goal is to grow at the high end of two to three SIR. Our objective obviously is to get the combined company onto that trajectory. Obviously, we performing below my expectations. We're not happy as a management team. Let me try to unpack this story a bit for you and bring you through where we are right now and what the pathway ahead is going to be. So, we were clear on our last call that the growth profiles for ADI and LTC are quit different in the automotive sector today.

ADI, the legacy business increased at the level of 2 to 3 SAR in '17 and it looks like we're on track again this year to achieve that kind of level, whereas the LTC has been low single digits according and we're engaged today on almost every self-driving platform that is in development today, both with what we would call traditional OEMs and some disruptors out there as well.

That technology, which we've been using -- we've gained traction in mission-critical aerospace areas, for example, it's a really ideal fit to the emerging autonomous vehicle requirements and it's sued as a fail safe function in the event of a regular system failure.

I will turn to the electrification side of things and our BMS business, which we got from our LTC acquisition. We've been winning back business we might have lost or had lost by changing our business logic, as I talked earlier about, tilting toward growth, defending our sockets aggressively and also leveraging the scale and flexibility of the ADI manufacturing system to change the cost profile of the products.

We're broadening LTC's customer base into the strong relationship that legacy ADI has with North America and with European OEMs. Also our next generation BMS will improve on our already leading performance levels by delivering, again, more miles per charge and bringing all the robustness and safety features to play as well.

One other aspect of the electrification business is the momentum that we have in our isolation. We have a franchise of very unique isolation technologies that tend to get used anytime that there's a high voltage and low voltage connection. These technologies are very important in electrical vehicles, so I think we're doing well there, not to mention the broad-based revenue synergies we've got on the power side of things.

In a reasonable period of time, we should be able to add a point or two of overall growth to the automotive business given the design cycles that we've got and the strength of the power portfolio. I think we're very focused on bending the growth curve, then if we're focused on the right apps, the right customers, we have a terrific technology story. With the complementary customer bases and geo footprint coverage, I feel very optimistic about the future and our ability to get that growth curve to where we have publicly said it should be and will be. I know that's a long answer, John, but I thought it was important to give the story in terms of where we are today and talk a little bit about the future as well.

Michael Lucarelli -- Director of Investor Relations 

Thanks, John. In the interest of getting more callers on the call, we're going to move to our next call, Jennifer.

Operator

Your next question comes from William Stein with SunTrust.

William Stein -- SunTrust -- Managing Director

Great. Thank you for taking my questions. Thanks, especially, for the robust answers in particular around wireless 5G. But there's a controversy brewing in that market with these decisions around ZTE, as to whether you might or might not be able to ship components to them. I'm wondering two questions about that -- one, what does your outlook assume in terms of sales to ZTE going forward? Second, how would a stop ship order to ZTE influence your view as to the growth of that market overall? In particular, might we see a slowdown of adoption in China if they don't have two local champions. Thank you.

Vincent Roche -- President and Chief Executive Officer

Yeah. Thanks for the question. The way we view it, in the short-term, there's a certain amount of fixed CapEx in place to upgrade the various networks across the globe. We have factored into our numbers a potential continued embargo with regard to ZTE. It's built into our numbers. It was a small amount of headwind for the company last quarter. I think overall, most geos are up. In communications for ADI, we're gaining share. You know, my sense is as well, we're obviously staying close to the situation, as best we can tell, the negotiation outcomes that are taking place.

But I will tell you clearly US and China need each other. I think trade between both is very, very critical. My sense is that sense will prevail and the need for free trade, unencumbered trade will prevail. We're expecting political leaders to figure this out. My sense is at the end of the day, there's demand there for more and more connectivity. Carriers are determined to keep building their networks out, to capture the opportunity, build revenue and profit streams. That demand is going to be fulfilled one way or the other.

Michael Lucarelli -- Director of Investor Relations 

Thanks, Will. I think you put two questions in there, so we'll move to the next caller.

Operator

Our next question is from Craig Hettenbach with Morgan Stanley.

Craig Hettenbach -- Morgan Stanley -- Executive Director

Yes, thank you, question on consumer -- you appear to be navigating the fall of at your largest customer. So, just from a high level if you could look at the puts and takes and some of the drop off there versus other opportunities and areas where you're actually growing within consumer.

Vincent Roche -- President and Chief Executive Officer

So, as you know, Craig, we've got two different stories there. One is our prosumer, which looks a lot like our B2B market with lots of products and different applications globally. That business has been strengthened as well with the addition of the LTC revenue applications. That's in the $300+ million area, so it's a significant portion of consumer for ADI. We're expecting looking into our back end of third quarter and fourth quarter what is normally a seasonably strong quarter to be so.

We've stated previously that consumer will be down 20% to 30% for the year. This is how the year appears to be trending now. So, our strategy remains the same, to leverage our technologies into areas of very, very high differentiation where we can get a high return on investment and we continue to execute against that strategy.

Michael Lucarelli -- Director of Investor Relations 

Thank you, Craig. Do you have a follow-up?

Craig Hettenbach -- Morgan Stanley -- Executive Director

I do. Thank you. Just a question on free cashflow and capital allocation, encouraging to see the big step up of free cashflow in the quarter. As you're on the doorstep of that two turns target for net leverage, can you remind us, in terms of just priorities, acquisitions versus returning cash and how you think about that.

Prashanth Mahendra-Rajah -- Chief Financial Officer

Yes. It was a great quarter for us in free cashflow, but I do want to remind folks that our cashflow can be lumpy quarter to quarter. So, the right way to measure us is on a trailing 12 months. We finished this quarter with trailing 12-month of $1.9 billion. So, we recognized that this franchise throws up a considerable amount of cash and therefore, we want to be very thoughtful on how we deploy that excess cash once we achieve our 2X leverage ratio, which we would expect to do in the next two quarters. We are very thoughtful on how we deploy that excess cash once we achieve our 2X leverage ratio, which we would expect to do in the next two quarters.

We are very mindful of the debt that we took on as a result of the Linear acquisition as well as the opportunities that we have in front of us with share repurchase, dividend, and potentially some other uses as well. It's something we spend quite a bit of time internally debating and I think you'll hear from us in a coming earnings release as we're ready to talk more about our capital allocation strategy once we clear that important 2X threshold.

Michael Lucarelli -- Director of Investor Relations 

Thank you, Craig. Jennifer, can we have our next caller?

Operator

Our next question is from CJ Muse with Evercore.

CJ Muse -- Evercore ISI -- Managing Director

Yeah, good morning. Thank you for taking my question. Sorry for those Celts. I guess if I could combine my questions into one large one -- on the industrial side, could you share with us a little bit more detail in terms of what the drivers were there underlying that superb growth. Then can you talk about the sustainability of that growth going forward. Longer-term, as part of revenue synergies with linear, clearly auto has been a major focus, but could you kind of, I guess, help us see what kind of underlying growth we could see in that segment looking out the next one, two, three years. Thank you.

Prashanth Mahendra-Rajah -- Chief Financial Officer

Thanks for the question, CJ. The industrial business has been doing extraordinarily well. As you mention, we continue to be driving this with the technology investments that we've made. It is across the board, CJ. It is all geographies. It is all products. This is really a combination of the strength of the global expanding environment.

You know the PMI continues to be in an expansionary phase and that's compounded by the technology investments that have been made over the last several years which have now come together at a time where you can really see the driver in automation. You can see the driver in our instrumentation business. So, it's really across the board and it's hard to point to any other particular segment because it is so broad-based and it's a reflection of the investments that have been made over the last several years.

From where we sit today and you can see it reflected in our guidance for the coming quarter, we feel very strong about the coming quarter, the outlook is solid. Our book to bill is greater than one. Information from the channels, the information Vince gets form his customer visits are going to continue to tell us we're going to see this run for a bit longer.

Michael Lucarelli -- Director of Investor Relations 

Thanks, CJ. I'll also remind you our long-term growth running that business and we think that's a great growth -- 50% of our business and throws off great cash. Do you have a follow up, CJ? Actually, you fit in two questions there. Let's move to the next caller.

Operator

Your next question is from Chris Caso with Raymond James.

Chris Caso -- Raymond James -- Analyst

Thank you, good morning. First question, a little bit of a big picture question. Based on the comments of the prior question, it sounds like you do have a good degree of conviction that the favorable conditions will continue. Can you talk about the visibility you have to customer inventory levels into channel inventory, generally with mid to strong industry conditions, the ability you have to make sure customers are ordering in line with their needs and not over-ordering at this point.

Prashanth Mahendra-Rajah -- Chief Financial Officer

Thanks for the question. First, as a reminder, we have not moved to ASE 606. So, remember that our revenue is recognized on sell through from the channels. So, we really do provide our investors of what is the actual activity happening at the customer level.

The inventory that we're seeing in our channel now, roughly seven and a half weeks, that's relatively consistent with where we have been. We would expect through the normal course of the rest of the fiscal year, we'd expect to see that come down a bit. The inventory that we have in house is at 116 days. That's the improvement of about 8 days from where we were in the first quarter. We are comfortable in that 115 to 120.

So, I think that's where you'll see us with the balance of the period. Our sales organization does work very closely with channel partners to monitor that order activity to ensure that we're being mindful of the order lead times and ensuring that behavior is appropriate, but the biggest metric for us is the revenue we're reporting is on sell through. So, it's really not impacted by any noise in the channel, whether they're building or subtracting from inventory.

Vincent Roche -- President and Chief Executive Officer

Just another bit of color on that -- all the macroeconomics that I talked about at the start of my prepared remarks there benefit the industrial sector. My sense is from talking to customers globally, as has been the case at least for the last couple of years, they're pragmatically optimistic about the future, that we're in the longer term various applications in industrial and I think the optimism is even across automation, instrumentation, and the aerospace and defense areas. I think our customers are feeling good. I'm also feeling very, very good about where are and where the market is.

Michael Lucarelli -- Director of Investor Relations 

Jennifer, can we move to our next caller in the ineptest of time?

Operator

Your next question is from Ross Seymore with Deutsche Bank.

Ross Seymore -- Deutsche Bank -- Analyst

Hi, guys. Thanks for squeezing me in. Vince, thanks for all the wireless comps commentary earlier in the call. I just wanted to level set -- how does your 20% roughly coms business split between the wireless and the wired side. Given that you gave us all that color on the wireless side, I wondered what your expectations were for the wired part of the equation.

Vincent Roche -- President and Chief Executive Officer

Good question, Ross. Thank you. Today, with the acquisition of LT, our business now is about 50-50 between wireless and wireline. The wireless business, my sense is that can grow in the high single digits for quite a while to come. That's my long-term growth objective in that business. And you know, wired is somewhere in the mid-single digits as it has been growing. I think that's a reasonable way to balance the growth expectations across that business.

Michael Lucarelli -- Director of Investor Relations 

Do you have a follow-up, Ross?

Ross Seymore -- Deutsche Bank -- Analyst

Yeah. I'll make it a quick one for you. Vince, you mentioned a few times in this call about changing the business model at Linear to be a little more growth-centric. Can you give us an idea, given the long-term design cycles, I know it's not going to be immediate, but when should we as investors see the benefit of those tweaks to the admittedly successful linear model turning to a little bit more growth-centric?

Vincent Roche -- President and Chief Executive Officer

I think the areas where we believe we see the growth uptick in the shorter term over the next two years, that will be in the probably communications as well as automotive areas. We have sockets already in place now that we should see the uptake on. To get to what I would consider to be the objective to put a couple points more total growth on the company's topline, it will take in the kind of two to four-year kind of area. If Hittite is any indication, given that the technologies play in similar markets, we're virtually four years into the closure of the Hittite acquisition. Over that period of time, we have managed to double the growth rate in that period of time.

So, given, Ross, that we expect for every dollar of ADI, revenue, which is largely mixed signal based, we expect a dollar of power, that's the kind of opportunity spread we're looking at, but it's going to take two to four years to see meaningful change in the topline.

Michael Lucarelli -- Director of Investor Relations 

Thank you, Ross. We'll move to our last caller.

Operator

Our final question comes from Craig Ellis with B. Reilly.

Craig Ellis -- B. Riley FBR -- Analyst

Thanks for sneaking me in. Vincent, thanks for the real tour-de-force on both auto and wireless. I wanted to follow up on Ross's comment and maybe take a longer-term look at the 5G opportunity that's in front of ADI. If we look back at the transition from 2G to 3G and then 3G to 4G, as you look ahead and look at 5G and potential for 5G to impact ADI revenues, the questions I have are one, how do you expect pacing in the 4G to 5G revenue transition to compare to prior transitions. When do you think we get to a point where 5G would be a majority of communications revenue? Relative to some of the growth rates that you talked about earlier on a subsegment basis, would you expect 5G when it becomes a much more material part of revenues to accelerate those growth rates. Thanks, Vincent.

Vincent Roche -- President and Chief Executive Officer

Yeah. Good question, Craig. If you consider 5G to be the initial introduction of 5G to be adding massive MIMO to 4G core network, I think we'll see meaningful revenue in the 2020 timeframe and I'd still think that 4G with massive MIMO will be a singularity portion of revenue into the 2022 timeframe. So, somewhere between 2022 and 2025 we'll start to see what we consider to see what we would consider 5G to become a more dominant part of our wireless communications infrastructure revenue.

So, at this point, Craig, it's a bit of a guess based on trying to triangulate in all the various conversations we have with carriers and customers, but I think clearly, we're starting to see the uptick in 4.5G, or as it's called in China, 5G massive MIMO based on 4G infrastructure at this point. Hopefully, that helps to give a bit of clarity to you.

Michael Lucarelli -- Director of Investor Relations 

Okay. Thank you, Jennifer and thank you, everyone for joining us this morning. A copy of the transcript will be available and all available reconciliations and information can also be found in the results section of our investor relations site at investor.analog.com. Thanks for joining and your continued interest in ADI.

Operator

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

Duration: 49 minutes

Call participants:

Michael Lucarelli -- Director of Investor Relations 

Vincent Roche -- President and Chief Executive Officer

Prashanth Mahendra-Rajah -- Chief Financial Officer

Tory Vonberg -- Stifel, Nicolaus & Company -- Analyst

John Pitzer -- Credit Suisse -- Managing Director

William Stein -- SunTrust -- Managing Director

CJ Muse -- Evercore ISI -- Managing Director

Chris Caso -- Raymond James -- Analyst

Ross Seymore -- Deutsche Bank -- Analyst

Craig Ellis -- B. Riley FBR -- Analyst

More ADI analysis

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