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Analog Devices, Inc. (NASDAQ:ADI)
Q4 2018 Earnings Conference Call
Nov. 20, 2018, 10:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to the Analog Devices Fourth Quarter and 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 fourth quarter and fiscal 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 related financial schedules at investor.analog.com.

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. We undertake no obligation to update these forward-looking statements in light of new information or future events.

Today's commentary about ADI's fourth quarter and fiscal '18 financial results will be detailed further in our 10-K, which we expect to file next week. Our comments today about ADI's fourth quarter and fiscal 2018 financial results and short-term outlook will also include non-GAAP financial measures, which exclude special items. When comparing our results to 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?

Vincent Roche -- Chief Executive Officer

Thanks, Mike, and good morning to everyone.

Well, I'm very pleased to report that ADI had another excellent quarter to cap off what was an exceptional year for the company. We once again hit a high water mark by achieving record revenue of $1.6 billion in the fourth quarter. In addition, we expanded operating margins to 43% and delivered $1.55 of diluted earnings per share.

Looking at the full year now, revenue surpassed $6 billion for the first time. Growth was led by our B2B markets that increased well into the double digits year-over-year. Diluted earnings per share increased more than 20% year-over-year and, most notably, we generated over $2 billion of free cash flow. This robust cash generation enabled us to continue investing in the future of our business, rapidly reduce our debt by over $1.5 billion during the year, and return cash to our shareholders.

As we outlined on the last call, going forward we plan to return 100% of our free cash flow after debt repayments. In fact, we've returned $10 billion to our shareholders since 2005 through dividends and share repurchases.

Beyond being a strong year financially, it was also a year of exceptional business progress for ADI also. So, I'd like to spend a little time describing our progress in 2018 and show how specifically it positions ADI for continued strength in 2019 and indeed beyond.

Firstly, we made tremendous progress in the integration of LTC using our best of both approach. Employees across the entire organization are unified and working toward a common goal of delivering long-term profitable growth. Our R&D teams have synergized product roadmaps and development activities and are busily extending the cutting edge of analog, mixed-signal power, and sensors to deliver impactful solutions to our customers.

Our combined sales force has made really great strides in building and converting our opportunity pipeline. In fact, our revenue cross selling opportunity has doubled in value since our Analyst Day across large customers and also in the broad market.

During the year, we successfully achieved our initial $150 million of cost synergies. In addition, as previously announced, we're optimizing our internal manufacturing footprint, reducing our cost basis by another $100 million while enabling a more agile operation that is positioned to capture new growth upside.

All that said, given the complementarity of our combined product portfolio and customer relationships, we're increasingly confident in our objective to double LTC's revenue growth over the next few years. In short, we've created an industry-leading product portfolio and team of analog, Rf, and power engineers with capabilities that range from sensor to cloud, from DC to 100 gigahertz, and from nanowatts to kilowatts.

We exit 2018 in a stronger position than we've ever been and are extremely well prepared strategically and operationally to grow and take market share in 2019 and indeed beyond. In addition to our preparedness, our confidence is grounded in a few externalities that transcend any potential short-term uncertainty in 2019. Namely, immutable technology macro trends that are creating secular tailwinds for ADI; ADI's analog expertise between the physical and digital domains becomes ever more critical to our customers' business success; and simultaneously, our customers are partnering more deeply with us to get the full benefit of our technology capabilities and product solutions to enable them to meet the innovation demands of their customers.

And we're very well aligned with these externalities and have been making strong progress during position success in 2019 and beyond. For example, in the wireless communication sector, you may have seen recent press around deployments of 5G massive MIMO beginning in Korea. ADI's software-defined transceivers are enabling those deployments, and this is just the beginning. Many other global carriers are expected to deploy 5G massive MIMO over the coming years.

Much of the innovation of 5G systems is taking place in the radio subsystem. Given the increasing demands for spectral space thermal and cost efficiency, our comprehensive portfolio of software defined, mixed signal, Rf, microwave, and power management technologies will enable ADI to create even more compelling solutions for our customers in the years ahead. These massive MIMO-enabled radios continue an eight times increase in radio channels, representing a significant growth opportunity for ADI, and the opportunity to capture potentially up to four times the content when compared to current 4G solutions.

I should note also that, in addition, power management's attached design winds in this area are just beginning. The progress thus far leads us to believe that our power portfolio will continue to provide tailwinds for us in communications in 2019 and in further years. And indeed, massive MIMO is just a stepping stone millimeter waved-based future generations. Here, carriers will look to increase the radio channel count up to 512 channels per radio, and we are very well positioned to once again solve these immense radio challenges with our comprehensive cutting edge portfolio. So, I believe we're really in the early stages of a multiyear growth cycle in this particular space.

So, now turning for a moment to the industrial sector, here the digital factory envisioned by Industry 4.0 is expected to increase productivity and lower costs. ADI has the heritage, the demand expertise, and the most comprehensive set of technologies and capabilities to deliver the required level of precision and robustness our customers need. For example, we're building beyond our traditional strength in precision control isolation of power products by adding communications technologies such as industrial grade deterministic Ethernet and sensors in areas such as depth, motion, and vibration, which more than triples our content opportunity and expands or addressable market.

In automotive, FY '18 was a year of really solid progress, and I have increased conviction that we're on the right path to return to our target growth rate of at least high-single digits annually. Growth in our cabin electronics business has accelerated to a double-digit growth rate this past year, driven mainly by our long-term strength in audio processing. And our future is equally bright here. We're adding new vectors to our audio processing foundation like A-to-B and C-to-B media transport technologies, and we're attaching our power management portfolio in these engagements, as well, positioning us for continued strong growth in this particular subsector.

On the active safety side of the business, high-speed signal processing technology is required to deliver ever increasing levels of precision in level 3-plus autonomous vehicles. Here, ADI's radar, LiDAR, and IMU solutions, coupled with power management, are strengthening our position across nearly all self-driving programs. And as in the case with Baidu, our customers are relying on ADI to achieve their vision of fully autonomous vehicles.

In the electrification application area, we've made stellar progress in strengthening our BMS solutions in FY '18. Our current generation delivers up to 20% more miles per charge compared to the competition and extends the battery's useful life. We are now sampling our next-generation solution, which provides another efficiency and performance leap while adding additional safety features. Beyond that, the subsequent generation of our multi-generational roadmap includes architectural innovations that will change the way the BMS problems of power density, accuracy, and weight are solved in the future.

And finally, I'd like to say a few words about our healthcare business and progress. Revenue in this market has increased at a double-digit growth rate over the past five years, and I believe it's really just getting started. In areas such as remote patient monitoring and digital x-ray systems, ADI's expertise in high-performance sensing, signal processing, and power control is ever more critical to our customers.

For example, in the area of digital x-ray imaging, several years ago we made a pivot to a domain-inspired approach to solve our customers most difficult problems. We've leveraged our strong heritage of high-end component building blocks and have pushed the innovation curve to new levels to create highly integrated subsystems, from photons to bits for example.

These solutions have simplified an intensely complex problem by reducing our customers design challenges while lowering radiation dosage and simultaneously increasing image fidelity. We have thereby extended our addressable market to capture new levels of value. And in general in the healthcare area, I believe that economic needs and new technology adoption are converging to enable a new vein of growth in the future for ADI.

So, in closing, I've put forth the constructive scenario here today, and while some may be a bit skeptical given the present macro uncertainty and geopolitical fears that beset our world, our confidence, I believe, is very well founded. We have a diverse business across customers, products, and applications that positions us to succeed and excel in any macro climate. We've added enormously to our cutting-edge technology portfolio during the year, and we've deepened our customer engagements. So, we're in a position to capture the upside while being agile enough to weather any perturbations in the marketplace.

And amid an environment of increasing change and complexity, we continue to leverage our greatest asset: Our people who continuously push the edge, learn and adapt to create evermore innovative solutions for our customers each and every day, which ultimately drives returns for our shareholders

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

Prashanth Mahendra-Rajah -- Chief Financial Officer

Thank you, Vince. Good morning, everyone, and let me add my welcome to our Q4 '18 earnings call.

As usual, with the exception of revenue and 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.

We wrap up 2018 with another record-setting quarter. Revenue at $1.6 billion and EPS of $1.55, and we converted this growth into strong cash flow, generating over $2 billion on a trailing 12. But before I get into the details of the income statement, let me cover the end markets.

Our fourth quarter B2B revenue increased 13% year-over-year, led by double-digit growth in the industrial and communications markets. The highly diverse industrial end market represented 49% of sales in the quarter and increased 10% year-over-year. Most sectors increased compared to the year-ago quarter, led by strength in instrumentation, healthcare, aerospace, and defense. As expected, this growth was moderated by slower demand in factory automation, mainly related to China.

The comms market, which represented 22% of sales in the fourth quarter, increased once again at a double-digit rate year-over-year, driven by strong performance in both the wireless and wired markets. Growth in our wireless business was broad based and accelerated as continued momentum in our 4G business was augmented by early deployments of massive MIMO. We expect this to carry into 2019 and beyond as 5G represents an enormous opportunity for ADI.

Our auto business represented 15% of sales in the quarter and increased at a low single-digit rate year-over-year. Growth was led by cabin electronics and the BMS application.

And lastly, our consumer business represented 13% of sales in the fourth quarter. As expected, revenues declined year-over-year; however, portables declined less than expected.

Now moving on to the P&L. Revenue for the quarter was at the high end of our guidance at approximately $1.6 billion, increasing 4% year-over-year. Gross margins of 71.2% increased 30 bps year-over-year and were flat sequentially.

OpEx in the fourth quarter was $452 million, and at approximately 28% of revenue, well within our target of sub-30. And finally, op margins were record at 43%.

As we continue to deliver, non-op expenses in the fourth quarter declined to $56 million, and with our full-year true-up, our Q4 tax rate was approximately 8%. Non-GAAP diluted earnings per share for the fourth quarter came in above the midpoint at $1.55.

Now moving on to the balance sheet, inventory increased 4% sequentially, and days were 114 in the quarter, relatively flat from third quarter. Disty inventory declined sequentially and exited the year right in line with our target of six to eight weeks.

We generated free cash flow of approximately $2.2 billion, or 35% of sales over the trailing 12 months. And as of yesterday's closing price, our free cash flow yield is 6.8%. During the quarter, we repaid $225 million of debt and paid $179 million in dividends. And as we outlined in our last earnings call, we have resumed our share repurchase program now that our leverage is sub-two. As of yesterday, we have purchased nearly $260 million worth of shares.

CapEx in the fourth quarter was $86 million, and we expect it to continue to run at our model of approximately 4% of sales for 2019.

Before I move on to guidance, I want to remind you that in the January quarter, we will adopt a new rev rec standard, ASC 606, to coincide with the start of our 2019 fiscal year. We are among the last few SEC registrants to do so due to the timing of our fiscal year. We have historically deferred revenue and the related costs for shipments to certain distributors until the distributors resell their products to their customers. Upon adoption of ASC 606, we will recognize revenue upon shipment to our distributor.

We plan to provide a historical quarterly end market revenue lookback under the new standard with our first quarter 2019 earnings release, meaning you will see changes in our historical growth rates, as they will reflect revenue from shipping into distribution versus shipping out. But for context, during 2018, the change in channel inventory for the year was pretty minimal, as channel inventory increased in the first half and was reduced in the second half of the year. On average, over the past three years, channel inventory impacts annual revenue by plus or minus 1%, while quarterly variances could be and have been larger.

Now on to guidance, which, with the exception of revenue and non-op expenses, are also on a non-GAAP basis and exclude the items outlined in today's release. As a reminder, the first quarter of 2018 was a 14-week quarter. So, all of my comments on revenue growth and our commentary during the Q&A session will exclude this extra week. So, we are normalizing our growth rates to give you a like-for-like comparison.

First quarter revenue is expected to be $1.51 billion at the midpoint on both the old and new rev rec methodology. To be clear, we are forecasting a midpoint of $1.51 billion on both a sell-in or new ASC 606 standard, as well as a sale-through basis because we expect minimal change in channel inventory during the first quarter.

At the midpoint of guidance, we expect total revenue to increase 7% year-over-year on a sell-through basis. We expect our B2B markets of industrial, auto, and comms in the aggregate to increase low-double-digits year-over-year, led by the communications market. This would represent our eighth consecutive quarter of double-digit year-over-year revenue growth for our B2B markets.

Under the new rev rec method, year-over-year growth would be approximately 4% at a company level and at high-single-digit rate in the B2B markets for the first quarter. We are planning for gross margins to be approximately 70.8, lowered sequentially due to the normal shutdowns around the holidays, as well as business mix. We are expecting operating expenses to be around $450 million at the midpoint. This is down slightly sequentially and does include some one-time items, so you will not see the usual lift going into Q2. We expect op margins in the first quarter to be approximately 41%. We expect our non-op expenses to be approximately $56 million, and our tax rate will be in the range of 14% to 16%. This tax rate is slightly higher than our previous outlook due to new IRS guidance released in September.

Based on these inputs, diluted earnings per share, excluding special items, is expected to be $1.28 plus or minus $0.07.

Before moving onto the Q&A session, I want to inform you that this will be the last quarter we're going to be providing gross margin and OpEx guidance. This will be the only change, as we will continue to provide the other items for outlook, including operating margin. This does not change our long-term operating model that we discussed that our Analyst Day of 70% plus gross margins and op margins in the range of 39% to 45%. We are making this transition as it aligns to the way we manage the business. That is, we focus on driving profitable growth and operating margin expansion.

So, all in, it was a terrific quarter to cap off a very successful year for ADI. And while we are mindful of the economic uncertainty around us, I will echo Vince's optimism that we enter 2019 equally excited about the opportunities ahead.

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

Michael Lucarelli -- Director of Investor Relations

Thanks, Prashanth. Okay, before we move to Q&A, I want to remind everyone of a couple points. First, we are moving to sale and accounting starting first quarter '19. And second, the first quarter of 2018 was a 14-week quarter. As such, our commentary around expected growth in the first quarter 2019 will exclude these two factors. In short, our growth commentary will be on a 13-week sell-through basis.

Okay, let's get to our Q&A session. Please limit yourself to one question, and after our initial response, we will give you an opportunity for a followup 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 Tore Svanberg with Stifel.

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

Yes, thank you. Good morning and congratulations on the results in a tough environment. The first question is on the industrial business. So, obviously it's very diversified, and I'm just wondering if you could comment a little bit on what your customers are seeing there as far as the slow down. Are they sort of in a wait-and-see based on what the macro political situation is, or are they perhaps a little bit more optimistic about '19? Just trying to gauge how your industrial base is feeling right now.

Vincent Roche -- Chief Executive Officer

Thanks, Tore. Well, I think I've talked with quite a few customers, both domestically here in America and internationally over the last quarter, quarter and a half, maybe quarters. In the atmosphere of the macro uncertainty driven by trade war rhetoric and so on, so forth, and the impacts of the tariffs, I'd say generally speaking customers are remaining optimistic, though there is obviously concern which is dampening enthusiasm for laying down CapEx and taking a long-term view to demand.

So, I would say at this point in time what we're seeing though is cancellations are at kind of a normal rate and lead times for the most part are pretty normal. So, in the industrial market itself, we're seeing pockets of softness. I would say in the automation part of our business, it's largely softening in China. We are seeing strength, for example, in the electronic tests and measurement side of our business. Obviously, healthcare has remained strong for the company. I think aerospace and defense is also an area of continued growth and some good acceleration there over the last quarter or two.

So, I think that provides you some color. From our point of view, Tore, we've obviously been investing heavily from an R&D and customer engagement standpoint over really the past decade. So, I think for ADI, we're better positioned than we've ever been in that market. It is our number one focus, I would say. It's broad, it's deep. It's got many thousands of products, many thousands of customers associated with it. So, we're optimistic about our capacity to continue to grow content and to gain share as we have been doing in '18 and beyond.

Michael Lucarelli -- Director of Investor Relations

Thank you, Tore. Do you have a followup?

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

Yes. Thank you, Vince. That was very helpful. So, I had a clarification question. You mentioned now with the synergies between Linear and ADI, I think you used the word double. I'm just wondering does that mean the revenue synergies are now up to $2 billion, or is it...If you could just clarify that statement. Thanks.

Vincent Roche -- Chief Executive Officer

I think back in '17 when we had our Analyst Day, we were talking at that point in time about our visibility and confidence toward a billion dollars. So, yeah, we're well above that now and looking at continuing to grow, and we're certainly confident that we've doubled that synergy number over the past year and a bit.

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

Thank you.

Michael Lucarelli -- Director of Investor Relations

Honestly, I would [crosstalk] a bit why we're so confident we can double the growth of Linear as that pipeline expands. Okay, thank you. Can we take our next question, please?

Operator

Our next question comes from John Pitzer with Credit Suisse.

John Pitzer -- Credit Suisse -- Analyst

Good morning, guys. Thanks for letting me ask you questions. Can you guys hear me?

Vincent Roche -- Chief Executive Officer

Yes, hear you fine.

John Pitzer -- Credit Suisse -- Analyst

Pardon me, Vince. Thanks for letting me ask a question and congratulations on the strong results. Vince, just on the comms sector, you had mid 20% year-over-year growth last quarter. You just put up almost 30% growth this quarter. You did highlight some of the drivers there. I'm wondering if you could dissect that growth a little bit. I know that you were really positive about the backlog you had with Hittite now, but it was under sort of your control from that M&A long product cycle design. To what extent has Hittite helping to drive this growth? And I guess are you at all concerned that some of this growth might be pull-ins from China trying to get these parts before the trade war escalates and potentially not being able to get these parts, just given how important massive MIMO and 5G are? Maybe you can help allay some of those concerns and just give us a little bit more detail there.

Vincent Roche -- Chief Executive Officer

Yeah. Thanks, John. Good question. So, let me start with the latter part of your question first. I don't get any sense that there's any form of tension or panic buying by our Chinese customers to get ahead of any tariffs or trade war concerns. Remember, as well, what we're seeing now is an accelerated build-out of I would say enhanced 4G and moving into the early stages of 5G. That's a multiyear process anyway, no matter what. So, what I'm seeing is a good balance between what we see as the increasing demand from the carriers and I would say the supply from our customers to meet the carrier's demands.

When you put the whole thing together, we're looking at '19 being another year of double-digit growth. We have -- as I said, we've got 4G tailwinds, and that's driven by content gains we've been making over the last three years I'd say. Hittite incidentally -- just to give you a little bit of a benchmark here. When we acquired Hittite, it was roughly a $270 million trailing 12-month revenue company. The Hittite portion of our business is well over $400 million at this point in time, and isn't just communications. It's where microwave and those radiofrequency technologies are used in aerospace and defense other parts of the instrumentation industrial market.

So, I think when you put the massive MIMO addition to 4G, or 5G as some people call it, and the early stages of 5G, that gives ADI a tremendously increased opportunity value over 4G. As I said in the prepared remarks, my sense is that we've got a four-times content improvement as 5G begins to ramp up here. And that by the way doesn't include -- we're not including any specific targets for LT in that number, but there's a huge cross-selling opportunity. We're beginning to go to production with power designs at this point in time. So, I think the tailwinds are strong and ADI's content has grown. Our portfolio has never been stronger. So, that's what we're seeing. I think it's a share gain story for ADI.

Michael Lucarelli -- Director of Investor Relations

Thanks, John. Do you have a followup?

John Pitzer -- Credit Suisse -- Analyst

Yeah, just quickly guys. I hate to bring it up because it's such a small percentage of the revenue and the growth drivers, but you have historically just given us some color on the consumer segment and how we should be thinking about that, especially given the different launch times of flagship handsets. How do we think about consumer going into the January quarter?

Vincent Roche -- Chief Executive Officer

Well, looking into '19, we started the year off a bit stronger given the content that we have in some of the older platforms. All that said, we're still expecting that consumer will decline somewhere between 10% to 20% on the portable side in '18, while the prosumer part of our business which looks a lot more like a B2B sector is continuing to perform well for the company. So, I think the way to look at this, John, after this year's growth, growth will be determined by essentially new sockets, either what we win or what we lose. That will determine ultimately what happens I think after '19. But as always, we're optimistic about where we're playing in consumer, and we'll continue to be selective in the areas where we target. We're always seeking to increase diversity of application and customers. So, I think that's the snapshot of consumer at this point.

Prashanth Mahendra-Rajah -- Chief Financial Officer

John, we're looking for a 7% increase on a sell-through basis for the consolidated company and 12% for B2B. So, you should be able to impute the numbers you need for consumer.

John Pitzer -- Credit Suisse -- Analyst

Thank you, guys.

Michael Lucarelli -- Director of Investor Relations

Thank you, John. We'll go to our next question.

Operator

Our next question comes from Craig Hettenbach with Morgan Stanley.

Vincent Roche -- Chief Executive Officer

Good morning, Craig.

Craig Hettenbach -- Morgan Stanley -- Analyst

Good morning, thank you. Vince, can you just expand on the comment around the confidence in automotive returning to kind of high-single digits. And then if you're able to frame it, I know there are some A-B programs that may help in the coming years, as well as kind of BMS, but just any additional details would help.

Vincent Roche -- Chief Executive Officer

Thanks, Craig. Well, first and foremost, cabin electronics -- that part of our business has done very well during '18, and we're well positioned for more growth in '19. So, the growth in that area was double digits in '18. And yes, the A-B application space is growing for the company. We've added this new media transport modality, as well, that we call C-B. And we're also now getting the benefit of adding LTC's silent switcher technology internal some of these sockets, as well. So, we're at the early stages of an up-ramp in our power business there.

I think, as well, it was well publicized during the year that we had some troubles with our battery management solution technology, but I think we've really turned the corner, particularly in the second half of '18. In the second half, we achieved double-digit growth, and we expect '19 also to be a double-digit growth performer for ADI.

So, as I mentioned in the prepared remarks, as well, we're sampling our next-generation BMS. And we've got some very interesting architectural innovations, as well, coming on the back of that that will change the way these systems are designed and implemented in the electrification activity.

On the sensing side, again, I've talked about some of this in the prepared remarks. Across radar, we're sampling our 77 gigahertz image quality radar. We have a very interesting and growing diversified pipeline in the LiDAR sector that combines both LT and ADI mixed-signal technologies. Many customers are starting to use our IMU, the internal management units, in the kind of L3-plus autonomous driving area.

So, I think we have continued to accelerate during '18 in terms of stabilizing BMS and starting to get back to a growth trajectory and a lot of exciting things going on in autonomous vehicles, as well. So, hopefully, Craig, that frames it up for you.

Michael Lucarelli -- Director of Investor Relations

Thanks, Craig. We're going to ask you to move to one question and no followup given the interest of time. Can we have our next question, Jennifer?

Operator

Our next question is from CJ Muse with Evercore.

CJ Muse -- Evercore -- Analyst

Good morning. Thank you for taking my question. I guess more of a cyclical macro question. You talked about seeing some softness in China. Curious if you're seeing a softness anywhere else, particularly as you think about strong US dollar and potential impact to emerging market demand. Would love to hear your thoughts cyclically where you might be seeing other pockets of weakness, if at all.

Vincent Roche -- Chief Executive Officer

Thanks for the question, CJ. So, from a geographic perspective, what I'm going to talk about here is based on design in revenue, so what's happening in each region from an innovation design standpoint. I'd say as we've come out of the year, all markets have increased year-over-year. Growth was led by China. I'd say looking at the sequential trends geographically, most markets were slightly up or a little down, and no big moves one way or another to report there. Industrial was up year-on-year. It was a little weaker quarter-on-quarter. Automotive was up year-on-year, again a little weaker quarter-on-quarter. But we believe that was related primarily to macro effects.

There's SAR, China, this new testing modality that's being adopted in Europe. But we expect it to come back in the first quarter to our target. Communications, across the board all the primary geographies in which we're strong in communications were up very, very big on a year-on-year basis and also sequentially. That broad-based strength was led by China, as well as the EU particularly in the communications area.

So, hopefully that gives you a sense for the atmosphere on the geographic basis. Prashanth, do you want to add anything?

Prashanth Mahendra-Rajah -- Chief Financial Officer

CJ, I would just add that remember we think about our geographic revenue based on where activity is designed. So, when we think about from a market standpoint, I mentioned factory automation was one that was seeing some softness. Automated test equipment was the other area we were seeing some softness. But outside that, really the rest of industrial has been staying in growth mode. So, that's what's forming our confidence for the Q1 outlook.

CJ Muse -- Evercore -- Analyst

Thank you.

Michael Lucarelli -- Director of Investor Relations

Thanks, CJ. We'll move to our next question.

Operator

Our next question is from Mark Lipacis with Jefferies.

Mark Lipacis -- Jefferies -- Analyst

Hi. Thanks for taking my question. I was wondering if you guys have noticed any shifting of the supply chain, manufacturing out of China into other areas, and if that is impacting your own business? Thank you.

Vincent Roche -- Chief Executive Officer

I don't think there's anything really of note. First off, we're not so impacted by the tariffs, but there are some signs that our customers are trying to work around the cost impact of the tariffs. I think there are some passing on of the costs to end customers. And also a very small amount -- at least from our perspective, I'd say a very small amount of mitigation by our customers by moving to areas not affected by the tariffs when it comes to manufacturing their products. But I think it's very, very de minimis at this point in time.

Prashanth Mahendra-Rajah -- Chief Financial Officer

Mark, I think we're probably more familiar with our specific production, and what we're seeing is customers looking at supply chain changes that will allow them to maybe avoid staging products in the US that would then get further assembled and have those go directly to other countries where the assembly happens, and thereby avoiding the tariffs.

Mark Lipacis -- Jefferies -- Analyst

Thank you.

Michael Lucarelli -- Director of Investor Relations

Thanks, Mark. We'll move on to our next question.

Operator

Our next question is from Ambrish Srivastava with BMO.

Ambrish Srivastava -- BMO -- Analyst

Hi. Thank you very much. Vince, I just want to make sure I understood your comments about the slowdown. Some of it you're characterizing it as a near-term uncertainty. You did talk about cancellations. Can you just help us understand what the order rates were doing as you were entering the current quarter? And then more importantly, what are the factory loadings going to look like at ADI. Structurally, the company is a lot more profitable than in the past cycles. Just help us understand the playbook if we were to go into a deeper downturn. Thank you.

Prashanth Mahendra-Rajah -- Chief Financial Officer

I'll take some of those and, Vince, you can add some pieces. So, let me take factory utilization. Certainly, we're headed into the holiday season, so our factory utilization is normally unaligned a bit for those that are impacted by Thanksgiving and then again for the Christmas/New Year period. So, utilizations are coming down, but not necessarily linked to changes in the demand environment beyond our original planning areas.

In terms of booking activities, certainly our industrial business is seeing book-to-bill below parity, and it's been a while since we've seen that. But as I mentioned, we see most of that being heavily weighted from the two segments factory automation and automated test equipment.

Order activity has stabilized from where it was. Now, I don't think we have the wherewithal to call the bottom here, but I'm just giving you the facts that we certainly saw an improvement in October versus what we saw in September.

Vincent Roche -- Chief Executive Officer

So, I think, Ambrish, another little bit of color. So, I would say for the most part, what we're seeing is really a pause rather than any...We're not seeing cancellations as such. I think it's a pause. It's the macro uncertainty that's causing customers to be a little cautious. Lead times for the company are really normal, and I would say, as I've just said, cancellations are normal.

And just to give you a little more depth of color on that. So, the legacy ADI is well within the normal range of supply chain metrics. In other words, greater than 90% of our portfolio is shipping within the normal four to six-week window that we're inclined to report. LT is a little more mixed. We've had some I would say tightening of supply. Demand has been strong, and supply has been a little tight.

But we've been investing aggressively and putting in place new capacity, in fact, over the last couple of quarters to support not just today's shortfalls, but also to support the future growth that we're expecting and increasingly optimistic about. So, the book-to-bill is, as Prashanth said, is just a little bit of parity on the side B2B side, driven largely by industrial. But I think the book-to-bill that we've given or that we're seeing is very supportive of the guidance that we've put out there.

Michael Lucarelli -- Director of Investor Relations

Thank you, Ambrish. Next caller, please.

Operator

Our next question is from Ross Seymore with Deutsche Bank.

Ross Seymore -- Deutsche Bank -- Analyst

Hi, guys. Thanks for letting me ask a question and congrats on the strong results. A bigger picture question for you, Vince, is I think you said that the guidance would imply the eighth consecutive quarter of double-digit year-over-year growth in your B2B business, a very impressive track record for sure. As I go back in my model, that's the longest stretch of double-digit growth I can find at any point in time. So, I guess two points on that. How much of that do you think is company specific share gains, target investments, et cetera, versus a cyclical uplift, and how do you view the sustainability of the growth rate or even the target growth rate for your B2B segment?

Vincent Roche -- Chief Executive Officer

Yes, there are a lot of very good questions there, Ross. So, I'd say -- I mean it's very hard to parse out precisely what is market, what is ADI. Clearly, we as a company have -- we retooled the entire strategy of the company eight, nine, 10 years ago to focus very, very heavily on the B2B area. In fact, we're spending today 95% of our R&D in the B2B spaces, and most of our customer engagement activities, as well of course, are in the B2B areas. So, the addition -- the added R&D focus on the legacy ADI portfolio in the B2B area, the addition of Hittite and now LTC, where LTC was largely focused on B2B, I think positions the company well.

We have been taking share, and that I'm sure of, and I believe we will continue to gain share. And of course, we were aided by favorable macro trends I think generally speaking. PMI has been positive for the last several quarters, and GDP has been strong. So, obviously the environment is strong, but I think ADI's is executing in a more focused, more intense way, as well, in capturing the opportunity.

So, we believe, again, that B2B will increase within our, I think, more moderated growth range. We've said that for the long term, that if we can grow our B2B business kind of two to three times GDP, we would be content on ongoing basis. And that's my sense for '19, as well, barring any macro cataclysm that, we're going to that kind of growth rate in the coming year.

Ross Seymore -- Deutsche Bank -- Analyst

Thank you.

Michael Lucarelli -- Director of Investor Relations

Jennifer, we'll move to our last question, please.

Operator

And our final question comes from Vivek Arya with Bank of America Merrill Lynch.

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

Thanks for taking my question, and congratulations on the good results. Just a question on the competitive landscape. You mentioned massive MIMO is a strong area of growth for you. Xilinx has also been talking their RFSoC product. I'm wondering how do you see the competitive landscape shaping up and what's your visibility and designments on next-general 4G and then 5G?

Vincent Roche -- Chief Executive Officer

So, I think first off there are many, many solution variants out there between the antenna and the bit stream so to speak. We have the strongest portfolio of technologies, right from the antenna down into the bit stream area. So, as I said earlier, as we move into the 5G -- the early stages of 5G here, we're looking at potentially four times the content availability compared to the classical 4G that we've been part of over the last five to seven years.

When we get into the millimeter wave side of things, again, we've got the broadest portfolio. We can architect in a very flexible way to all the various customer needs. So, as 5G millimeter wave comes in, we're looking at potential gains of eight, 10-plus in terms of potential content, just given the channel count on the radio transceivers, which by the way is where most of the innovation is taking place in these 5G systems, at least until they virtualize in the early '20s or so.

So, there are kind of three of four major building blocks on these base stations these days. There's the classical transceiver. There's the massive MIMO addition. There's all this power technology that we can bring to bear now, as well, for our customers. And then there's the digital baseband, the digital front end. And we're innovating not just in the analog space, but we're also pushing the boundaries incidentally on the digital side. And those boundaries, they blur, they shift, they ebb and they flow over multiple generations. But in our software-defined transceivers, for example, we've taken a significant amount of digital content and combined it with our converter technologies and our radio interface capabilities and dramatically reduced the footprint of the radio and cut the power levels down, as well.

So, those are all important answers to very, very critical problems that our customers have. So, my sense is over the next say five years until we get into millimeter wave, we're looking at a potential content increase of three to four times, and then it's a question of how many radios deploy. But we're very, very well positioned from the content and architectural coverage standpoint.

Michael Lucarelli -- Director of Investor Relations

Thank you, Vivek. And thank you everyone for joining us this morning. A copy of the transcript will be available on our website, and all available reconciliations and additional information can also be found at the Quarterly Results section of our website. We look forward to seeing you this quarter at Credit Suisse Conference and the BMO Conference in the coming weeks. Thanks for joining us and have a great Thanksgiving.

Operator

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

Duration: 51 minutes

Call participants:

Michael Lucarelli -- Director of Investor Relations 

Vincent Roche -- Chief Executive Officer

Prashanth Mahendra-Rajah -- Chief Financial Officer

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

John Pitzer -- Credit Suisse -- Analyst

Craig Hettenbach -- Morgan Stanley -- Analyst

CJ Muse -- Evercore -- Analyst

Mark Lipacis -- Jefferies -- Analyst

Ambrish Srivastava -- BMO -- Analyst

Ross Seymore -- Deutsche Bank -- Analyst

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

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