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Analog Devices, Inc. (NASDAQ:ADI)
Q3 2018 Earnings Conference Call
Aug. 22, 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 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.

Michael Lucarelli -- Director of Investor Relations

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, 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 in our most recent 10-Q. These forward-looking statements reflect our opinion as of the date of this call and we undertake no obligation to update these forward-looking statements in light of new information or future events.

Our 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 post under the quarterly results section at investor.analog.com.

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

Vincent T. Rothe -- President, Chief Executive Officer, and Director

Thanks, Mike, and good morning to everyone. Analog Devices, 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 communications 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 enables us to achieve our 2x leverage ratio goal three quarters ahead of plan and we are pleased to announce that we've 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 innovation and investment in industrial automation.

For many industries, the digital factory will bring greater supply chain efficiencies, higher quality, more flexibility, and a safer workplace, all contributing to higher productivity. This smart factory in which cyber-physical systems monitor the physical process of the factory or plant will use additional data for decentralized decision-making, human assistance, increased safety, and more predictability. This will require a mass deployment of intelligent sensors at the edge. For many decades, ADI has been viewed as the go-to edge solution provider. The place where the data is born, so to speak, and I'll highlight later how we are enabling this evolution.

Although ADI is excited about this emerging opportunity, we expect this transition to take time, while the deployment of today's existing sensing, signal processing, and power architectures will continue to drive growth for many years. In fact, our core automation business represents a significant portion of our total industrial business today and we're taking a long view to ensure we keep at the cutting edge of technology and customer support. Our domain expertise is unmatched and gives us invaluable insights to understand our customers' challenges and where the markets are going.

And we've been investing ahead, broadening our portfolio through targeted R&D, collaborating with leading automation customers, and leveraging strategic M&A to enhance our offerings to include algorithms and software. At the same time, we've extended our reach with the addition of the LTC sales force and FAEs and the complementarity of our customer bases enables us to access more opportunities at current customers and increase penetration at new customers.

We believe that these targeted investments position us to continue to grow our market share and to outperform in the years to come. For decades, our products and solutions have been adopted by many thousands of customers around the world. Their equipment is used at the factory floor level across a very diverse set of end markets, such as automotive, pharmaceutical, oil and gas, smartphones, food and beverage, and many, many others. And this is a long lifecycle business. Once qualified and deployed to strict industrial requirements, customers keep using ADI's proven products. This makes this business very sticky with high barriers to entry.

With a broader set of technologies and capabilities, our customers continue to turn to ADI for the best performance and precision, robustness and safety. The addition of LTC adds high-performance power to our already expansive portfolio, enabling further innovation. And, in fact, power plays an increasingly critical role in solving more and more of the design challenges of our customers, as they further automate in space- and energy-constrained areas. For example, we just recently launched a product that enables up to eight analog outputs on a card, previously unachievable due to excess heat. We succeeded by combining the signal chain expertise of ADI with LTC's power know-how to maintain an unchanged power density.

Safety is also critical. These systems require essential electrical isolation barriers to protect low-voltage electronics, as well as humans, from high voltages. Traditionally, customers have used optical technology to transfer data across these safety barriers. However, frustrated by their lack of reliability and power, we increasingly see customers turning to ADI for our digital isolation technology. So with unique architectures and leading process technology, our iCoupler isolation solutions are significantly more reliable and can transfer data and power twice as fast as our nearest competitor. We also remove customers' industry certification pain with ready-to-use solutions, accelerating their time to market.

As a result of all that, we have shipped over 2 billion channels and are increasing our market share and driving revenue growth well into the double digits annually. Today, as manufacturers respond to a more demanding consumer base, they are turning to more distributed and flexible architectures. With this in mind, I will focus now on two examples to highlight how innovation at the factory floor is driving new growth opportunities for ADI.

The first is robotics. Across all geographies, significant investments are being made to upgrade from a labor-intensive footprint to a more sophisticated automated infrastructure. Repetitive tasks are now being performed by collaborative robots, commonly known as co-bots. These are smaller robots that work in collaboration with humans. While the traditional large-scale industrial robotics industry remains healthy and growing, the newer collaborative robotics market is in the early stages of growth. Collectively, this market is expected to grow at more than 10% annually, adding more than 500,000 systems per year by 2022.

ADI is unique in our ability to combine all these key technologies for the traditional large-scale robots, as well as the fast-growing co-bot segments. Along with our traditional precision control technology solutions, including signal chains and digital isolation, we effectively more than triple our content opportunity with the addition of power management, communications, and sensors.

The second area of innovation is the flexible factory floor. Here, robots operate in tandem with many other systems, including PLC controllers and a vast array of sensors and actuators. These machines or devices are designated as either inputs or outputs. Several years ago, ADI took on the challenge of implementing an integrated software-configurable architecture based on our high-performance precision signal processing portfolio. With this breakthrough in innovation, ADI created a disruptive capability, allowing universal selection and configuration of many types of input and output devices. This has opened new opportunities and allows customers to easily install and reconfigure their automation equipment.

In addition to flexibility, the big value impact comes in the total cost of ownership at the factory level. Significant savings for customers include eight weeks, on average, faster installation time, savings on engineering, and a significant reduction in factory space. Factory production flows can be adapted more easily and these changes that could traditionally take hours can now be done in minutes. With this new capability, we've increased our sun by an additional $200 million. And since our initial design wins at leading customers over the past year, we've substantially increased our opportunity pipeline.

As we look toward the future with the digital factory, flexible architectures with an increase of robotics will enable the transformation of manufacturing. With that comes a demand for higher bandwidth, predictability of machine help, robustness in security. Working closely with our customers, we've invested to extend our portfolio and ability to solve these challenges. In addition to offering the most robust industrial wireless networking technology, ADI is enabling the transition to newer secure connectivity architectures. We're leading the path to higher bandwidth, industrial-ready Ethernet, using the latest time-sensitive networking standards. ADI's industrial Deterministic Ethernet is a far cry from standard Ethernet and provides the determinism, reliability, robustness, and the security required in the hostile environment of the digital factory.

Finally, our sensing and measurement technology provides contextual data, enabling predictive outcomes. ADI's depth, optical, and touch sensors are used to create safe working zones for humans, while vibration, electrical, and temperature sensors are used for condition-based monitoring, predicting the mechanical wear of the machines to maximize factory up-time.

So, to summarize, at the edge of the factory floor, where the data is born, ADI is the leader in industrial automation. This market has grown steadily for many years and we're witnessing a new era of opportunity, innovation, and growth. While our core technologies continue to provide the foundational performance for control and precision, our new investments double our sun and allow us to solve the emerging challenges our customers face. All in all, I'm very optimistic about what the future will bring for ADI in this new world.

So, with that, I'd like to hand over to Prashanth, who will take you through the financials.

Prashanth Mahendra-Rajah -- Senior Vice President of Finance and Chief Financial Officer

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, and 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 communications 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 all applications increasing over that time period. ADI organic revenue performed well once again, increasing high single digits year-over-year. And, finally, our consumer business represented 13% of sales in the third quarter and, as expected, decreased year-over-year, primarily due to lower demand for products used in the portable consumer applications.

Now moving on to the P&L. Revenue for the quarter was $1.57 billion, above the high end of our guidance, increasing 8% year-over-year and up 4% sequentially. Gross margins of 71.2% increased 70 bps year-over-year and, given the mix of business, were down slightly sequentially.

OpEx in the third quarter was $448 million, or 28.5% of revenue. Strong revenue growth combined with operational execution resulted in operating margins at the high end of guidance at 42.7%.

Non-op expenses in the third quarter were approximately $58 million and our tax rate was approximately 6%. Non-GAAP diluted earnings per share for the third quarter came in above the high end of guidance at $1.53, increasing more than 20% year-over-year.

Moving on to the balance sheet, inventory increased 2% sequentially and days were 112 in the quarter, down four days from the second quarter. Distribution inventory was just above seven-and-a-half weeks, flat sequentially and up modestly compared to the year ago quarter.

We generated free cash flow of approximately $570 million in the quarter, bringing our trailing 12-month free cash flow to a record $2.2 billion, with associated free cash flow margin of approximately 36%. And during the quarter, we also paid down $430 million of debt, bringing our net leverage to 2x. Capital additions in the third quarter were $52 million and we expect CapEx to continue to run at our model of approximately 4% of sales.

During the quarter, we paid $179 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.

All in all, it was a terrific quarter and the Q4 guide is equally strong, which, with the exception of revenue and non-op expenses, are also on a non-GAAP basis and exclude items outlined in today's release. At a high level, we're expecting the fourth quarter to look a lot like the third quarter. We're planning for the revenue in the fourth quarter to be in the range of $1.53 billion to $1.61 billion.

At the midpoint of guidance, we expect our B2B markets of industrial, auto, and communications in the aggregate to increase in the low double digits year-over-year. This would represent our seventh consecutive quarter of double digit year-over-year revenue growth for our B2B markets.

We're planning for gross margins to be approximately 71%. We expect our operating expenses to be in the range of $440 million to $450 million. At the midpoint of guidance, this implies OpEx as a percentage of sales will be approximately flat sequentially, which brings operating margins in the fourth quarter expected in the range of 42% to 43%. We expect non-op expenses to be approximately $57 million and our tax rate around 7%. And based on these inputs, diluted EPS, excluding special items, would be in the range of $1.46 to $1.58.

Now, before we move to the Q&A session, I wanted to provide some context for last night's press release. As I mentioned earlier, we achieved a 2x leverage ratio during our fiscal third quarter, just 16 months post-closing of the Linear acquisition. Over those 16 months, we paid down $2.3 billion of debt, or nearly one-third of the debt we raised for the deal. During this same period, we also returned approximately $850 million to our shareholders through dividends. With this milestone achieved, we can now provide more clarity on our capital allocation plans.

Our first call on capital will always be to invest in the business, whether through targeted R&D, smart capital spending, or strategic M&A. These investments ensure we continue to have the right technology portfolio to increase our competitive advantage and drive profitable and sustainable growth.

Given the profitability of this franchise, the long-term prospects for our business, and the benefits from U.S. tax reform, we now plan to return 100% of our free cash flow after debt repayments to investors. Under this framework, the dividend policy remains the cornerstone of our capital allocation policy. We have increased the dividend 15 times over the last 14 years and remain committed to our goal of a 5% to 10% increase annually.

As you saw in yesterday's press release, we are reinstating our share repurchase program and announced a $2 billion authorization from our Board of Directors. We plan to use this approval to offset dilution and, over time, lower our share count. We believe this capital strategy will continue to deliver value for our shareholders and allow us to continue the investments necessary to meet the evolving needs of our customers in a dynamic growth environment.

So, to wrap it up, this was another record quarter for ADI across many metrics. The strength in our business resulted in strong revenue growth and profit conversion. We see this momentum continuing for Q4 and the early achievement of our 2x leverage goal enables us to reinstate our share repurchase program.

And, with that, let me turn it over to Mike for our Q&A session.

Michael Lucarelli -- Director of Investor Relations

Thanks, Prashanth. Okay. Let's get to the Q&A session. Please limit yourself to one question. After your initial response, we'll give you an opportunity for a follow-up question. Operator, 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 "*1" on your phone. If your question has been answered and you wish to be removed from the queue, please press "#". If you are listening on a speakerphone, please pick up the handset when asking the question. We'll pause for just a moment to compile the Q&A roster.

Our first question comes from Craig Hettenbach with Morgan Stanley.

Michael Lucarelli -- Director of Investor Relations

Good morning, Craig.

Craig Hettenbach -- Morgan Stanley -- Analyst

Good morning. Thanks so much. Can you hear me now?

Vincent T. Roth -- President, Chief Executive Officer, and Director

We hear you fine, Craig. Yeah.

Craig Hettenbach -- Morgan Stanley -- Analyst

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

Vincent T. Roth -- President, Chief Executive Officer, and Director

Yeah. 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 communications. 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 sheet. 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 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. I think over the foreseeable future, industrial will perform in the two- to -three times GDP area, probably at the higher end of that.

Clearly, communications, 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 communications side of the business. Also, there's a significant upgrade cycle taking place in kind of the optical back hall. So I foresee 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 kind of the mid-single digit growth level. So it's, I'd say, moderate but a very, very important part of what we're doing.

Michael Lucarelli -- Director of Investor Relations

Thank you, Craig.

Craig Hettenbach -- Morgan Stanley -- Analyst

Great.

Michael Lucarelli -- Director of Investor Relations

We're actually moving to the next call given the time constraints we have.

Operator

Your next question is from Ambrish Srivastava with BMO.

Ambrish Srivastava -- BMO Capital Markets -- Analyst

Hi. Thank you very much for letting me ask a question. I just wanted to focus on the gross margin side. I get the mix change. Consumer was stronger, at least versus what we were modeling. So it came 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?

Prashanth Mahendra-Rajah -- Senior Vice President of Finance and Chief Financial Officer

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 both 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 level. 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 communications 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'll remind everyone that we do have about another $100 million of cost synergies, which should start layering in toward 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 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.

Michael Lucarelli -- Director of Investor Relations

Just one quick follow-up to that. Prashanth was talking about the fastest growth sequentially. On a year-over-year basis, the strongest growth once again would be industrial and communications, which both grow in the double digits.

Can we have our next caller please?

Operator

Your next question comes from John Pitzer with Credit Suisse.

Michael Lucarelli -- Director of Investor Relations

Good morning, John.

John Pitzer -- Credit Suisse -- Analyst

Good morning, guys. Good morning. Thanks for letting me ask some questions. Congratulations on the strong results, especially B2B. My question is just a little bit on the consumer side. If I back into -- kind of using your B2B guidance for Q4 to be up kind of low double digits, you kind of back into a 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?

Vincent T. Roth -- President, Chief Executive Officer, and Director

Yeah. 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.

Michael Lucarelli -- Director of Investor Relations

Thanks, John. Can we move to our next question please?

Operator

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

Vivek Arya -- Bank of America Merrill Lynch -- Analyst

Thanks for taking my question. Your industrial and communications segments are doing quite well but auto, at this kind of 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 to double digit growth rate that a number of your competitors are growing at? Thank you.

Vincent T. Roth -- President, Chief Executive Officer, and Director

Yeah. 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 digit arena. So there are two primary components, I would say, that we're working hard to correct, particularly on the legacy LT side of things.

No. 1 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 that we've made there, particularly in the last two quarters, holding onto 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're leveraging the ADI cost base, where we've got fundamentally better cost structures, to make sure that we take our own fair 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 year-and-a-half, two years. But somewhere in the 2020 area, I expect us to see a meaningful bend upwards in the growth curve.

Michael Lucarelli -- Director of Investor Relations

Thank you, Vivek. Can we have our next question?

Operator

Our next question is from Stacy Rasgon with Bernstein Research.

Stacy Rasgon -- Sanford C. Bernstein & Co. -- Analyst

Hi. Good morning. Thanks for taking my question. I just wanted to get back to the segment growth. Were you trying to imply that everything is actually growing? I know you gave 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 comment everything -- are you still trying to say everything is flat to up sequentially? Or do you still have some B2B segments that could be down sequentially even driving double digit year-over-year growth?

Prashanth Mahendra-Rajah -- Senior Vice President of Finance and Chief Financial Officer

No, Stacy, you got it right. Everything, as we move from Q3 to Q4, is up sequentially. 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 communications and automotive. And that is driving some mix impact overall, which gets back to, I think it was Ambrish's question.

Stacy Rasgon -- Sanford C. Bernstein & Co. -- Analyst

Got it. 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 10%, I guess, is what you have to be implying with that guidance.

Prashanth Mahendra-Rajah -- Senior Vice President of Finance and Chief Financial Officer

Correct.

Michael Lucarelli -- Director of Investor Relations

I think, if it was 10%, we would have said 10%.

Stacy Rasgon -- Sanford C. Bernstein & Co. -- Analyst

Low double digits to me means probably anywhere between 10% and 12%. That's how I think about it, Stacy.

Stacy Rasgon -- Sanford C. Bernstein & Co. -- Analyst

That's very helpful. Thank you.

Michael Lucarelli -- Director of Investor Relations

Thanks, Stacy. Next question please.

Operator

Your next question is from Tore Svanberg with Stifel.

Tore Svanberg -- Stifel, Nicolaus & Co. -- Analyst

Yes. Thank you and congratulations on the strong results. 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? Thank you.

Vincent T. Roth -- President, Chief Executive Officer, and Director

Yeah, good question, Tore. So I think from a global standpoint, what we see is that the macro economy is mainly constructive right now. You're seeing 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 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 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 two to three times GDP growth level. And probably at the higher end of that.

Tore Svanberg -- Stifel, Nicolaus & Co. -- Analyst

Very helpful. Thank you.

Michael Lucarelli -- Director of Investor Relations

Thank you, Tore.

Operator

Our next question is from Chris Danely with Citigroup.

Michael Lucarelli -- Director of Investor Relations

Good morning, Chris.

Christopher Danely -- Citigroup -- Analyst

Hey, guys. 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 communications? So communications 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 that industrial is slowing, what should that mean for gross margins over the next several quarters? Should we think of them as sort of a flat-ish type of trajectory?

Vincent T. Roth -- President, Chief Executive Officer, and Director

Yeah, 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 back hall market, in particular, 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 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.

Prashanth Mahendra-Rajah -- Senior Vice President of Finance and Chief Financial Officer

Thank you, Vince. So, Chris, the way that I would guide you to think about gross margins longer term is, I think, sort of flat-ish from where 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 communications business has great margins but not as strong as the industrial. And, as Vince mentioned, as we see more growth in that communications 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 flat-ish to where we're expecting Q4 to be.

On top of that, 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 California.

Christopher Danely -- Citigroup -- Analyst

Great. Thanks for the color, guys.

Michael Lucarelli -- Director of Investor Relations

Thanks, Chris. Can we have our next question, Jennifer?

Operator

Our next question comes from Blayne Curtis with Barclays.

Jerry Zhang -- Barclays -- Analyst

Thanks, guys. 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 de-leveraging going forward?

Prashanth Mahendra-Rajah -- Senior Vice President of Finance and Chief Financial Officer

Thanks, Jerry. So I guess the way I would guide folks to think 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 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 30% 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 gonna 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 $1 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 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. Thank you for the question.

Jerry Zhang -- Barclays -- Analyst

Great. Thanks.

Michael Lucarelli -- Director of Investor Relations

Next question please.

Operator

Our next question is from Toshiya Hari with Goldman Sachs.

Toshiya Hari -- Goldman Sachs -- Analyst

Hi, guys. Good morning. 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. Thank you.

Vincent T. Roth -- President, Chief Executive Officer, and Director

Yeah, 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 of 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 I'm not gonna 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 three or four 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.

Michael Lucarelli -- Director of Investor Relations

Thanks for the question. Jennifer, can we move to our final question please?

Operator

Yes. And our final question comes from William Stein with SunTrust.

William Stein -- SunTrust Robinson Humphrey -- Analyst

Great. Thank you for squeezing me in. Congratulations on the good results, especially with regard to the balance sheet and the buyback. 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 the same issue with Linear. Thank you.

Vincent T. Roth -- President, Chief Executive Officer, and Director

Yeah, good question. And 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 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 of the $270 million-ish stating revenue point, you can back out what those numbers are. We're in the early stages. It's taken us basically, I'd say, three 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 mix signal opportunity that ADI has -- it's $4.5 billion-ish today, at today's 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 two 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 3-4 years is a reasonable expectation.

William Stein -- SunTrust Robinson Humphrey -- Analyst

Okay. Great. Thank you.

Michael Lucarelli -- Director of Investor Relations

Okay. Thanks, everyone, for joining us. Thank you, Will. A 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.

Operator

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

Duration: 47 minutes

Call participants:

Michael Lucarelli -- Director of Investor Relations

Vincent T. Roth -- President, Chief Executive Officer, and Director

Prashanth Mahendra-Rajah -- Senior Vice President of Finance and Chief Financial Officer

Craig Hettenbach -- Morgan Stanley -- Analyst

Ambrish Srivastava -- BMO Capital Markets -- Analyst

John Pitzer -- Credit Suisse -- Analyst

Vivek Arya -- Bank of America Merrill Lynch -- Analyst

Stacy Rasgon -- Sanford C. Bernstein & Co. -- Analyst

Tore Svanberg -- Stifel, Nicolaus & Co. -- Analyst

Christopher Danely -- Citigroup -- Analyst

Jerry Zhang -- Barclays -- Analyst

Toshiya Hari -- Goldman Sachs -- Analyst

William Stein -- SunTrust Robinson Humphrey -- Analyst

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