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Analog Devices Inc (NASDAQ:ADI)
Q1 2020 Earnings Call
Feb 19, 2020, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to the Analog Devices First Quarter Fiscal Year 2020 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, Senior Director of Investor Relations. Sir, the floor is yours.

Michael Lucarelli -- Senior Director of Investor Relations

Thank you, Sheryl, and good morning, everybody. Thanks for joining our first quarter fiscal 2020 conference call. Moving 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 the relating financial schedules at investor.analog.com.

Now on to the disclosures. 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.

Our comments today about ADI's first quarter of fiscal 2020 financial results and short-term outlook will also include non-GAAP financial measures, which exclude special items. The comparative results to historical performance, special items are also excluded from their prior periods. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures and additional information about our non-GAAP measures are included in today's earnings release.

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

Vincent Roche -- President and Chief Executive Officer

Thanks, Mike, and good morning to everybody. While our first quarter results were in line with our expectations, as you all have seen, importantly, we managed our operating costs and working capital effectively to position ourselves to deliver margin expansion in the quarters ahead.

Before I discuss the quarterly highlights, I'd like to address the coronavirus outbreak. First and foremost, our top priority is the health and safety of those affected and of course our employees. We're doing everything we can to provide our customers with the support they need to minimize disruption to their businesses. And while the situation remains fluid, we are monitoring it closely. Prashanth will expand on the financial implications in just a while.

So now on to the first quarter, revenue was $1.3 billion, down versus the prior year, but in line with our expectations. Operating margin was approximately 37%, a decline versus last year due to lower revenue and our decision to lower utilization. Adjusted earnings per share was $1.03 above the midpoint of guidance. Over the trailing 12 months, we generated approximately $2 billion of free cash flow, equating to a 35% free cash flow margin and this continues to place us in the top 10% of the S&P 500.

On our call last quarter, we shared our priorities for 2020, and I'd like to give you an update on our progress so far. Priority one is the efficient use of our capital. The first call in our capital is funding new product development activities. In the first quarter, we invested over $250 million in R&D with more than 90% of this spend targeting the most attractive opportunities across our B2B markets.

For example, an area of increased focus for ADI is our power franchise. Here we've been increasing R&D to enhance our strong position in the broad markets and to extend into new opportunities across areas like data center, automotive and 5G infrastructure. Our power design win momentum remains strong and we expect to double the LTC historical revenue growth rates in the years ahead of us. At the same time, we remain committed to delivering strong shareholder returns. In the first quarter, we returned over $300 million to shareholders, and we just announced a 15% increase to our quarterly dividend.

Priority two is deepening customer centricity. As I've shared before, the combination of our broad product portfolio, domain expertise and manufacturing capabilities sets ADI apart. We're always anticipating the technology needs of our customers and engaging with them fairly in order to solve their toughest challenges. And I'd like to share just a few examples specific to our automotive segment with you now.

Our A2B platform continues to gain traction in the cabin electronics ecosystem. By leveraging our platform portfolio, we're opening up new applications for our customers, such as active noise cancellation. In the quarter, Hyundai became the 14th auto manufacturer to incorporate A2B technology. And together, we announced the industry's first all-digital road noise cancellation system. With the rise of active noise cancellation, we're creating stickier customer relationships due to the integration of our hardware and software capabilities, while increasing our SAM [Phonetic] per vehicle.

There's also a lot of intensity and urgency in OEMs moving toward electric powertrains. We were an early player in the market partnering with industry leaders to improve the efficiency of the battery in electric vehicles. As a result, our BMS solutions are delivering greater miles per charge and monitoring battery health more accurately. In the U.S. electric vehicle market, we are benefiting from near-term strength as customers ramp production. And new design wins across future models will help us to deliver on our long-term objective of growing BMS revenue at a double-digit rate.

Priority three is capitalizing on the secular trends to expand our addressable markets and drive diversifying growth. We've previously discussed with you key secular trends across our company, such as 5G electric vehicle factory automation and data center. Now today I'd like to spend some time on the space market, perhaps a more obscure sub-segment of our industrial sector. Our space customers' challenges are not just around RF, signal processing and power management, space solutions must also perform under extreme cosmic radiation and conditions of high temperatures.

We solve these challenges through the combination of our comprehensive product portfolio and the passive knowledge base built over many decades of serving this market. While space represents a couple of percent of ADI's total revenue today, the command stellar margins, and we see potential to double the business over the next five years.

Now, let me share a little more with you about why this sector is exciting to us. The space market is rapidly evolving. Over the last decade, unprecedented levels of capital have gravitated toward this vertical, thereby increasing the number of privately funded space companies by 20 times. Therefore, new technologies and capabilities are emerging that are leading to new opportunities for ADI. This includes the advent of low earth or LEO communications satellites. These satellites are becoming the new frontier in space with forecast suggesting that by 2020 over 20,000 will be in orbit up from just hundreds today.

To provide some context, LEO satellites differ from today's geostationary or GEO satellites. Technologically, they provide lower latency and higher bandwidth, which enable real-time communication. Operationally, they continuously change their position relative to the earth and only stay connected with a given terminal for approximately 10 minutes. As a result, the number of terrestrial terminals that communicate with these satellites whether they're on the ground or in the air will grow into the millions with the proliferation of LEO satellites.

To succeed in creating this network, both satellites and terminals must be capable of being steering. This requires an exponential increase in channel count enabled through phased array antennas, an architecture that is used in 5G networks already today. And as you can imagine, more channels packed into smaller form factors is increasing thermal and power hard disk [Phonetic]. To help solve the engineering challenges of creating this ubiquitous and always connected LEO network, our customers are increasingly turning to ADI; looking to us to not only be a supplier, but indeed a key system architect.

So we're engaging with customers early in their design process to develop end-to-end solutions from antenna to bits combined with power capabilities to deliver the required performance and of course robustness. Our ability to provide a comprehensive portfolio of space grid solutions across the entire analog spectrum from RF and signal chain to power is unique and this cannot be completely replicated by any of our competitors, making ADI the go-to supplier for our traditional OEMs, as well as the next wave of disruptors.

All told, we see the LEO communication satellite band becoming at least four times the size of GEO over the next five years. And with LEO refresh cycle compared to today's satellites, we expect our space business to deliver a steadier stream of revenue in the years ahead. In summary, space has the potential to be a meaningful growth driver and unlock value across other verticals as well. Once fully operational, these LEO networks will provide real-time, reliable high-speed connection globally, ushering an opportunities from autonomous driving to telesurgery.

So in closing, and speaking broadly about ADI, I believe demand for our solutions will be unprecedented as technological innovation underpinned by ubiquitous sensing, hyperscale and edge computing and pervasive connectivity continues to grow rapidly. And as I look ahead, I believe we're very well positioned to deliver sustainable profitable growth and indeed strong shareholder returns.

So with that, I'll hand it over to Prashanth.

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

Thank you, Vince. Let me add my welcome to our first quarter earnings call. My comments today with the exception of revenue and non-op expenses will be on an adjusted basis, which excludes special items outlined in today's press release. ADI delivered a solid first quarter. Revenue came in line with our outlook as we meaningfully reduced channel inventory. And through our disciplined spending, operating margin and EPS were above the midpoint of guidance. We also raised our quarterly dividend to $0.62, an increase of 15%, the high-end of our target range of 7% to 15%. The dividend is the cornerstone of our capital allocation policy and this represents the 17th increase over the last 16 years. These consistent increases reflect our commitment to strong shareholder returns, as well as our optimism about the long-term prospects for our business.

Before getting into the income statement, let me first cover the end market. In line with our expectations, our first quarter B2B revenue declined 15% year-over-year, as better than expected industrial demand was balanced by softer communications activity. Industrial, which represented 53% of revenue during the quarter, declined 7% year-over-year. As we forecasted, most applications within this highly diversified business declined, while aerospace and defense once again grew double-digits year-over-year.

Communications, which represents 18% of revenue during the quarter, decreased 31% year-over-year as wireless and wired both declined. While communications is an inherently lumpy market, our position has never been stronger or more balanced across the ecosystem. We are at the early stages of the global 5G rollout, which we continue to expect will be a multi-year tailwind.

Our auto business, which represented 16% of revenues during the quarter, declined 16% year-over-year due to weakness across all applications. As Vince highlighted, we remain confident in auto due to our strong pipeline of customer wins, especially in our infotainment platform and our market-leading BMS position.

And lastly, consumer, which represents 13% of revenue during the first quarter, declined 20% due to portable applications. As we said in our last earnings call, we expect 2020 to be the bottom for our consumer segment.

Now onto the P&L. Gross margin came in at 68.5%, up slightly sequentially and down 180 basis points year-over-year as favorable mix was offset by lower utilization. As a reminder, fab utilization was near trough levels this quarter in order to reduce our balance sheet and our channel inventories. Opex in the quarter was $412 million, down 4% sequentially and down 8% year-over-year. In light of the softer revenue environment, we curtailed spending and have delivered sequential opex declines in each of the past five quarters. As a reminder, we plan to exit fiscal 2020 with $50 million of annualized savings across cost of goods sold and opex.

Operating margin finished at approximately 37%, above the guided midpoint. Non-op expenses were $47 million, down $3 million sequentially and $9 million year-over-year, driven by lower interest expense. Our tax rate for the quarter was approximately 12%. All told, first quarter adjusted EPS came in above the midpoint of guide at $1.03.

Now moving on to the balance sheet. As we planned, inventory was reduced by about $20 million or 4% sequentially. Despite this reduction, our inventory days increased 133 due to the lower level of revenue. Recall that our target for inventory days is 115 to 125, but during the process of closing two legacy LTC facilities, we do expect to carry an additional five days to 10 days of bridge inventory to support our customers. We also reduced channel inventory by approximately $40 million in the fourth quarter and plan to reduce channel inventory in the second quarter again, but to a lesser degree.

Capex in the quarter was $55 million or about 4% of revenue. And we expect to end fiscal 2020 slightly below our 4% long-term target. On a trailing 12-month basis, free cash flow finished at $2 billion or free cash flow margin of about 35%. Over this period, we have returned more than 100% of our free cash flow to shareholders through dividends and buybacks after debt repayments. We paid approximately $200 million in dividends and repurchased $106 million of our stock in the first quarter. We still plan to pay down between $300 million to $500 million of debt in fiscal 2020.

Now I'll provide some context on our recent business trends and our current view on the coronavirus. In the first quarter, we saw signs of stabilization as we expected. Orders trended better throughout the quarter and have overall remained relatively resilient into the second quarter. However, unsurprisingly, we have begun to see weaker demand in China related to the extended Chinese New Year and ongoing business disruption. As such, our outlook assumes that China demand for industrial, automotive and consumer is minimal for all of February before returning to a more normal level in the last two months of our second quarter. And we are assuming an impact on our communications business due to the high likelihood of a delay in the 5G rollout. So while forecasting business dynamics in China is very difficult today, our guidance reflects our best estimates.

So looking ahead at Q2, revenue is expected to be $1.35 billion, plus or minus $50 million. This includes an approximately $70 million revenue reduction due to the near-term risks with the -- associated with the coronavirus. And as I said earlier, we expect to reduce channel inventory again, but to a much lesser degree than in the first quarter. At the midpoint of $1.35 billion, we expect B2B revenue in the aggregate to increase mid-to-high single-digit sequentially with growth across all of our B2B markets of industrial, automotive and communications.

Based on the midpoint of guidance, op margin is expected to be up sequentially to approximately 37.5%. We are planning for our tax rate to be between 10% and 12% for the quarter and we are improving our fiscal 2020 outlook to between 11% and 13%. Based on these inputs, adjusted EPS is expected to be $1.10, plus or minus $0.08. While we are mindful of the uncertainty around us, I echo Vince's optimism, we are encouraged by near-term trends that point to a stabilization and improvement across end markets and we are extremely confident in the long-term growth opportunities for ADI.

Let me give it back to Mike now to start our Q&A.

Michael Lucarelli -- Senior Director of Investor Relations

Thanks, Prashanth. Okay. 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. Operator, can we have our first question please?

Questions and Answers:

Operator

[Operator Instructions] And our first question comes from Vivek Arya from Bank of America. Your line is open.

Jamie Rebecca Zakalik -- Bank of America Merrill Lynch -- Analyst

Hi guys...

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

Good morning, Vivek.

Jamie Rebecca Zakalik -- Bank of America Merrill Lynch -- Analyst

This is Jamie Zakalik. Hi, good morning. This is Jamie on for Vivek. Thanks for letting us ask the question. So similar to peers, you guys noted some stabilizing and improving trends in end markets in the January quarter, but it seems that growth has actually decelerated across all the end markets. So I guess are the improving trends more in the -- in February even with a lot of these virus headwinds? And is it specific to any end market or geography or is it more broad-based?

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

Yeah. So Jamie. I think the first quarter was in line with what we expected. So there was deceleration going into the first quarter. Now remember that in this quarter we undershipped the channel. And as I said in my prepared comments, we undershipped by $40 million. So on a revenue rec basis, PO ship-in was $40 million below sell through.

As we go into the second quarter, orders were improving over the course of the first quarter and we expect that to continue into the second quarter with this note that we made on disruption in China where we believe some of this demand is going to get pushed out to future quarters. So I do think that our view here is that we've sort of bottomed out and it's better from here through subsequent quarters.

Vincent Roche -- President and Chief Executive Officer

Yeah. Maybe I can add a little bit of color as well from a market perspective on that. So what we're seeing is in spite of what looks like a delayed 5G employment -- deployment in China, in the second quarter, we are expecting growth, actually quite good growth in our communications 5G sector, as well as wireline. And you know that growth is becoming a little more broad-based. We're seeing, I would say a green shoots in the factory automation and process control side of things as well, which is a significant part of ADI's industrial business and also gathering strength in the ATE sector. And from an automotive standpoint, we're seeing particular strength in our business in America, as well as Europe at this point in time.

Michael Lucarelli -- Senior Director of Investor Relations

Given the long of that answer, we'll kind of push to the next caller please, Sheryl.

Operator

And our next question comes from Tore Svanberg from Stifel. Your line is open.

Tore Egil Svanberg -- Stifel, Nicolaus & Company -- Analyst

Yes. Thank you. Vince, I was hoping you could elaborate a little bit more there on 5G. You said it's becoming a more broad-based business. Just trying to understand geographically where the growth is coming from because obviously it's not coming from China near-term. So if you could elaborate a bit on that that would be great? Thanks.

Vincent Roche -- President and Chief Executive Officer

Well, I think, Tore, China has taken a pause. Asia is still at this point in time in terms of deployments today, Asia is by far the strongest in 5G. I think what we're seeing is the -- probably a faster roll-off in 4G than we had anticipated, 5G has taken a bit of a pause in China, but is set based on what we see in terms of demand is set for a ramp during the second quarter. And also I pointed out that wireline for ADI in general, whether it's data center, whether it's metro or long-haul networks is doing quite well. So as we come into the second quarter, our book-to-bill has been -- is well above one and that gives us the confidence in the growing strength of that business through the second quarter here.

Michael Lucarelli -- Senior Director of Investor Relations

Thanks, Tore. Do you have a follow-up?

Tore Egil Svanberg -- Stifel, Nicolaus & Company -- Analyst

Yeah, just a quick one. Prashanth, you did a good job lowering channel inventory. It sounds like you're going to lower a bit more again this quarter. Could you maybe give us some targets either by weeks or what dollar amount that you're trying to lower them by?

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

Well, I think, Tore, we had mentioned in the -- in our first quarter or fourth quarter call that our goal was to get back to our target range by the end of the second quarter. It may take us a little bit longer now given we didn't include the impact of the coronavirus in the top-line. So we're still heading toward the same channel inventory target that we've had before. But with a bit of a softer top-line, I think it might actually be end of third quarter before we're back in range.

Tore Egil Svanberg -- Stifel, Nicolaus & Company -- Analyst

Very helpful. Thank you.

Vincent Roche -- President and Chief Executive Officer

Thanks, Tore.

Operator

And thank you. Our next question comes from Toshiya Hari from Goldman Sachs. Your line is open.

Toshiya Hari -- Goldman Sachs Group Inc. -- Analyst

Good morning, guys, and thanks for taking the question. Your automotive business was down 16% in the quarter, which was in line with your guidance, but relative to peers, a little worse on a year-over-year basis. Vince and then Prashanth, you guys talked about your optimism around some of the design win activities in BMS and infotainment, but in the near-term, what's driving kind of the double-digit decline in your automotive business? Is that mostly channel inventory reduction? Are you losing share? I guess more importantly, how are you guys thinking about kind of the through cycle growth rate for your automotive business over the next couple of years?

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

Yeah. Well look, we have been very, very clear. The two growth drivers for ADI in the automotive sector are the infotainment area, A2B, active noise cancellation, audio signal processing in general and of course BMS has been over the last couple of years a double-digit growth driver for ADI. I think in the quarter just passed, BMS, which has a route, a strong route in China has suffered as a result of the virus. And -- but you know when we look into the second quarter, we expect our -- as I said, our second quarter has better trends in North America and Europe. So we're expecting modest growth in the second quarter.

The headwind for ADI has really been the safety sector where our 24-gigahertz radar technology is declining, probably at a rate a little faster than I had expected. And also in the area of MEMS, more of the kind of the passive safety MEMS where we withdrew investment three or four years ago. So I think we'll begin to bottom out I think on those headwinds. Specific to safety, we have a new safety modality in 77-gigahertz which is by all accounts, very, very exciting for our customers. We will see the bottoming I think of the MEMS and the 24-gigahertz radar decline. So my sense is in the areas we're effective, powertrain, infotainment, we're very, very well positioned to grow those sectors over the next two, three, four years.

Michael Lucarelli -- Senior Director of Investor Relations

Thanks, Toshi.

Toshiya Hari -- Goldman Sachs Group Inc. -- Analyst

Thank you.

Operator

Thank you. And our next question comes from Ambrish Srivastava from BMO. Your line is open.

Ambrish Srivastava -- BMO Capital Markets -- Analyst

Thank you very much. Prashanth, I had a question on the actual weeks of channel inventory, and I might have missed it. But did you give an actual number, I think you were 8.5 weeks in the prior quarter?

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

We did not -- we did not give a number, Ambrish. The -- what I mentioned is we took the channel inventory down $40 million. But if you do the math, we're still going to be above our target range because the revenue -- the numerator has moved but the denominator has also shrunk. So on a ratio standpoint, the weeks is still high, but we did take a big chunk out and we're going to take more out in Q2 as we mentioned.

Ambrish Srivastava -- BMO Capital Markets -- Analyst

Okay.

Michael Lucarelli -- Senior Director of Investor Relations

Do you have follow-up, Ambrish?

Ambrish Srivastava -- BMO Capital Markets -- Analyst

I did. Vince, maybe for you. In the two areas, real quick on industrials. What's the right way to think about given what's going on in China? And broader, how to think about return to growth in the industrials business? You guys outperformed last year, but what -- how should we think about year-over-year growth returning? And then in comms, we always ask you about wireless, I had a slightly different question. How is -- how are you guys positioned in wireline versus if you look back at two, three years ago? And then what gets you excited about the design wins that should be ramping out in wireline? Thank you.

Vincent Roche -- President and Chief Executive Officer

Thanks, Ambrish. Let me try and address the industrial question first. So we are seeing our aerospace and defense business continue to grow at double-digit rates annually. We are seeing, as I said, a little earlier on the factory automation side of things outside of Asia is on a, I'd say, a solid improvement in its demand pattern. I think inventory hangover has largely been taken out of the equation in the industrial sector.

So I think when you look -- when we look at the impact of the virus in China, we are not expecting really anything in the industrial sector in terms of shipments there for the month of February. But all that said, we have a very solid book-to-bill in the industrial sector. And we will get I think a decent increase in our top-line in industrial during the second quarter.

On the wireline side of things, our game there is really two pieces. We have a very strong -- we've a strong leadership position in optical control systems for data centers. So all of the fangs for example would use our technology in their data centers for control of the optical signal chain. And also the cable market we have a good position there and infrastructure system. So wireline business has been growing high-single-digits now for several years, and I don't see any decline in that. I think that will be a decent growth driver for ADI. It run into the region of $400 million annually in terms of sales at the present time. So I view that very much, Ambrish, as a tailwind for the company.

Michael Lucarelli -- Senior Director of Investor Relations

Yeah. Ambrish, I'd also add industrial side. We did take down channel inventory meaningfully, a lot of that relates to industrial. And if you look at industrial, kind of zoom out and look at it on a trailing 12-month basis, we're only down low-single-digit, which is a pretty good performance in a tough macro backdrop and that goes to the diversity of that business. With that, Sheryl, we'll go to the next question.

Operator

Thank you. Our next question comes from Mitch Steves from RBC Capital Markets. Your line is open.

Mitch Steves -- RBC Capital Markets -- Analyst

Hey guys. Thanks for taking my question. Great quarter. But I just wanted to clarify a couple of things. I think you guys did a very good job now kind of talking about your capital allocation. But what I'm having a hard time understanding is kind of the margin mix here, I realize that space and satellite is probably higher margin, I'm guessing like 80%, 90% gross margin, but you guys are actually coming down a bit on the gross margin line. Can you maybe talk us through what the gross margin profile should look like in the first half and the second half? And then how they would flow through to the operating margin line as well?

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

Sure. Yeah, thanks for the question, Mitch. So I guess a little bit of a background, right? Our model is 70% gross margin is our long-term model. And in good times, we were operating at 72%. In more challenging times, like now, we're down in the high-60s. So through the cycle 70%. As we move forward from here, we see two things that are going to be impacting margins, both utilization and mix. So Q1 represented the trough level of our utilization expectations for the year. So a fair amount of underabsorption at our internal manufacturing facilities that gets better from hereon and that will be tailwind to margins.

And also, as some of the questions that were asked, Vince mentioned the strength in industrial, we expect industrial to continue to be growing as we move forward, and industrial in general is one of our highest margin businesses. So that will also provide tailwind. So we -- I would expect that you could see sequential improvement in gross margins through the balance of this year, likely getting back to our model margins in the second half, maybe toward the end of the year.

Mitch Steves -- RBC Capital Markets -- Analyst

Okay. That's very helpful. And then I just have one follow-up, just in terms of the seasonality for the business. I think maybe you should probably be taking a little bit of a more conservative view in April just because it didn't sound like China is going to open up March 1. But when I look at the July quarter going from April to July, should that be I guess above seasonal given that April was depressed from all the macro items that are going on?

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

All right. So the guide for our second quarter included a $70 million adjustment that we made at the top for the impact of the coronavirus. And the math that we used to arrive at that is we essentially zeroed out February in China for industrial and auto and consumer. And then we also made an adjustment for communications being pushed, the deployment of 5G being pushed out a bit just because of the labor challenges that are going on there.

We expect that to begin unwinding as in the subsequent months and certainly be back to normal in the third quarter. Could it be above normal? That's certainly a possibility. It depends on the timing of how that $70 million comes back. It's our current view that that is purely a timing shift that that is not locked demand. But as to when that falls back in, it's hard to say. But the order activity certainly suggest that it's not going away.

Mitch Steves -- RBC Capital Markets -- Analyst

Okay, perfect. Thank you.

Michael Lucarelli -- Senior Director of Investor Relations

Thanks, Mitch.

Operator

Thank you. Our next question comes from Stacy Rasgon from Bernstein Research. Your line is open.

Stacy Rasgon -- Bernstein Research -- Analyst

Hi guys. Thanks for taking my questions. I wanted to zero in first on comm. So it sounds like you're pushing it out some. Your prior guidance for comm last year was for it to grow year-over-year, and it feels like you're backing away from that. But the trajectory in the second half on the old guidance was for very strong sequential growth kind of every quarter going forward. How should we be thinking about the trajectory of comm in the second half, I guess given -- I guess the bump in Q2 versus the profile that was -- that you had in mind three months ago when you gave this guidance. Do you still expect to see a similar ramp maybe just off a lower base?

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

Yeah. So just a few things, Stacy. For the first quarter, a little bit lower than we expected mainly due to the 5G pause that started in the second half of '19. Moving into the second quarter, orders have begun to come back in very much as we expected and our book-to-bill is above one. So that's supporting a strong sequential increase in second quarter for both 5G, but also as Vince mentioned, we're seeing some good strength in wireline as have been reported by number of peers as well.

The sequential increase is below our initial expectations because of the -- a lot of that was related to 5G timing in China. So I think everything is moving a little bit to the right here. So it's hard for us to say at this point whether the timing of that recovery is still going to put us up year-on-year, but I think we'll have to see how quickly this demand recovers and whether the installations happen as -- is it caught up in the year or not. But we feel very good that this is really a dislocation of demand versus actual loss or destruction.

Vincent Roche -- President and Chief Executive Officer

Yeah. I'd say one other comment on that, Stacy. Our optimism about what's happening in America related to 5G has strengthened over the past quarter as well. So yes, we have the disruption in China. It's really a delay of demand rather than destruction. But my own sense is that we'll probably see more activity in the back end of the year in the U.S. relating to 5G.

Michael Lucarelli -- Senior Director of Investor Relations

Do you have a follow-up, Stacy?

Stacy Rasgon -- Bernstein Research -- Analyst

I do. Thank you. So it sounds like also, even though we have the delay because of coronavirus in China that the order patterns still seem to be very strong. How do we think about the strength of those Chinese orders in relation to potential increases in sanctions that we've been hearing about? Do you feel like there is any sort of scramble on the part of Chinese customers to get out in front, although sanctions -- I guess what you're seeing in terms of customer behavior in relation to the regulatory?

Vincent Roche -- President and Chief Executive Officer

Yeah. I think first off, when you look at the geopolitical machinations, it's actually very hard to figure out what's going on. So -- but I think with our business in general, we have many thousands of customers in China, many thousands of product SKUs and we see ongoing demand. There are obviously areas where we are restricted, particularly in 5G. But I think the rest of our business right now is in a kind of a normalized market and regulatory situation. So the demand we are seeing is despite the disruption here because of the virus. The demand in China is actually quite strong across the board otherwise.

Stacy Rasgon -- Bernstein Research -- Analyst

Let me rephrase the question. If all of a sudden like the de minimis threshold gets dropped from 25% to 10% and the foreign direct products gets strengthened and they put more stuff on the control list, does that impact how you guys view the trajectory in China as we go through the year? Would you have to reevaluate what you can ship and what you can't?

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

Well yes, we would have to reevaluate. But remember that we have adjusted one large communications customer down from a traditional mid-single to low-single-digit as a percentage of revenue. So that is kind of -- that's the limit of our exposure depending on what happens to that particular customer.

Vincent Roche -- President and Chief Executive Officer

Yeah. I think that very much depends on the scope of what happens. And so far everything we've seen is relating to one specific area of communication. So unknown, Stacy, but we'll see, time will tell.

Stacy Rasgon -- Bernstein Research -- Analyst

Got it. Thank you, guys.

Operator

Our next question comes from Craig Hettenbach from Morgan Stanley. Your line is open.

Craig Hettenbach -- Morgan Stanley -- Analyst

Yes. Thank you. Just wanted to follow-on the comments about the opportunity to double Linear's growth in the coming years. And Prashanth, if you could talk about, I know there's some gross margin levers as you consolidate manufacturing and just kind of how you're viewing on that in terms of the growth profile versus kind of margins for Linear in the next couple of years?

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

Sure, sure. So I'll take the margins side of it and then in terms of doubling the growth, I'll let Vince comment. On the margins side of it, we have talked about the focus we've got on shutting down two facilities. We've taken -- we've made announcements on those. We've actually been able to accelerate some of the savings for the -- for one of the factory closure. So we're going to start seeing some of that benefit in cost of good sale at the end of this year. But the balance of that $100 million, we see feathering in over 2021. And as we have stated in the Q4 earnings call, our intention is to let -- to kind of let all of that come through the bottom line. So we are not looking to redeploy that cost of good savings. So you should see some lift in our gross margins on an ongoing basis as we exit 2020 and through 2021.

In terms of kind of the progress we're making to double that Linear growth rate, let me hand that up to Vince.

Vincent Roche -- President and Chief Executive Officer

Yeah. So we're -- I think we're making good progress, Craig, in trying to equalize the value of the kind of legacy ADI mixed signal technology value in a given application with power. So we're looking for equivalents. For every dollar of mixed signal, we expect to get a dollar of power, and that's what the market opportunity available is.

I can tell you that our pipeline for the OTC portfolio and specifically power is up about 40% actually year-over-year. And we're moving into production on the automotive sector, the communication wireless sector, wired, we're in early volume production as well. So we expect to see those areas ramp in terms of meaningful impact on the top-line during 2021. And there are many, many, many new sockets in the industrial area that we're working on. So that will just take a little longer given the slower uptake in terms of turning design-ins to revenue. But I think a lot like Hittite, we feel -- we went through this process with Hittite, we've doubled the size of that company that franchise over the last five years. And I think we're in a very good track right now with LT to achieving 200 basis points, 300 basis points of top-line growth based on the strength of the portfolio and the activity at the customer level that we're seeing.

Michael Lucarelli -- Senior Director of Investor Relations

Thanks, Craig. We'll go to the next caller.

Operator

Our next question comes from Harlan Sur from J.P. Morgan. Your line is open.

Harlan Sur -- J.P. Morgan -- Analyst

Good morning. Good to see the fundamental is starting to improve here. A&D grew greater than 20% last year. Defense budget was approved beginning of this year at strong, up 4% versus last year, and you guys expect double-digit, continued double-digits year-over-year growth here this year in A&D. Is most of the strength coming from the defense segment or are there also programs in the commercial aerospace, satcom sector that are starting to fire as well?

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

Yeah. As I said in the prepared remarks, obviously defense budgets are in our favor in terms of buying technology and deploying it. So we're in good shape there. And yeah, we're seeing strong double-digit growth in the space area as well. And that's relatively -- we've had a good position there, but the -- if you like, the explosion in the launch of LEO satellites and GEO satellites is really increasing demand for the company. And we're looking at in these applications many thousands of dollars of content for satellite kind of thing. So we're very optimistic about that, but it's a combination of both, both parts of that business are really growing well.

Harlan, I would say, remember, think about defense as when DoD gave some money to the primes and the primes start deploying it, this is going into design decisions that were made many years ago. So we are enjoying the flow of that larger budget into the primes and then to us for decisions that were made some time ago. We still have quite a bit of great design activity that has yet to be funded. So that's all going to come.

On the aerospace side, it's holding as well as it can be expected given the environment that's going on there. And then in space, as Vince mentioned, space is really in front of us, that growth is in front of us so while. That has been growing at a nice clip and continues to. We feel even more optimistic about what's in front of us coming both from space and future design win activity that happened for the defense business.

Michael Lucarelli -- Senior Director of Investor Relations

Thanks, Harlan. We'll go to our last caller please.

Operator

And our last question comes from William Stein from SunTrust. Your line is open.

William Stein -- SunTrust Robinson Humphrey, Inc. -- Analyst

Great. Thanks for taking my question. Two of them really. First, hoping you can provide some update or commentary as to the competitive situation and maybe the legal competitive situation with an FPGA supplier in high-performance converters, maybe competitive trends as to design win traction relative to that vendor?

Vincent Roche -- President and Chief Executive Officer

Well, broadly speaking in terms of competition, we are -- we've outgrown our closest competitors for the last, the last three years. And so we're clearly gaining share across the board in communications and industrial in particular. So I think competitively. We're in good shape. I think pricing is very, very stable as well. So I think overall, legacy is strong, our design pipeline is strong and we're excited about the new R&D programs as well that are coming to fruition for the company.

In relation to the litigation with as you said, large FPGA company, you know we will give you -- as new information emerges, we'll be transparent with you and we'll communicate with you. But at this point all I can say is that we're confident that this matter is going through the courts, it will be successfully resolved and we are defending our IP very aggressively and we believe we have a very, very strong case. So that's what it is. It's within the courts, but we're very optimistic with how things are going.

Michael Lucarelli -- Senior Director of Investor Relations

Do you have a follow-up, Will?

William Stein -- SunTrust Robinson Humphrey, Inc. -- Analyst

Yeah. I appreciate that. Just on the Covid impact. It sounds like what you're saying is that you're assuming certain orders are zero for February given where the February 19, I assume that's actually what you're seeing in the order book. Is there any anticipation for weakness later in the quarter? And also any supply disruption that you're noticing at all? Thank you.

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

Sure, yes. So on the orders, as I mentioned in the prepared remarks, it is very hard to kind of size the activity of what's going on in China. So when we arrived in our 70, we wanted to give the investor and analyst community what assumptions are we using knowing that these are very dynamic. So for our assumptions, we've taken our China activity to zero in February and pushed out a little bit of 5G.

On the supply chain side, we are not seeing much disruption at this standpoint. We had some of our back-end suppliers early on were struggling just with getting some labor into run their activities, but that's also been resolved as time has settled out here. So from our standpoint, our supply chain and we just revalidated this with the guys this morning, our supply chain we feel good about.

William Stein -- SunTrust Robinson Humphrey, Inc. -- Analyst

That's great. Thank you.

Michael Lucarelli -- Senior Director of Investor Relations

Thanks, Will. And I think it might be helpful given your question, kind of given our outlook of B2B what we think these market is going to do because it seems a little bit of confusion out there of how we think the market is going to do. We think each market grow sequentially. We said in total B2B will be up mid-to-high single-digits. Our rank order [Indecipherable] I'd say comms is a little better than that. Industrial does in line with the overall look and auto does a little bit worse. So that kind of help you think of how the Covidien -- sorry, how the corona is impacting our business.

And with that, thank you everyone for joining us. A copy of the transcript will be available on our website and all available reconciliations and information can also be found on the Quarterly Results section of our website. Thanks again for joining us, and your continued interest in Analog Devices.

Operator

[Operator Closing Remarks]

Duration: 49 minutes

Call participants:

Michael Lucarelli -- Senior Director of Investor Relations

Vincent Roche -- President and Chief Executive Officer

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

Jamie Rebecca Zakalik -- Bank of America Merrill Lynch -- Analyst

Tore Egil Svanberg -- Stifel, Nicolaus & Company -- Analyst

Toshiya Hari -- Goldman Sachs Group Inc. -- Analyst

Ambrish Srivastava -- BMO Capital Markets -- Analyst

Mitch Steves -- RBC Capital Markets -- Analyst

Stacy Rasgon -- Bernstein Research -- Analyst

Craig Hettenbach -- Morgan Stanley -- Analyst

Harlan Sur -- J.P. Morgan -- Analyst

William Stein -- SunTrust Robinson Humphrey, Inc. -- Analyst

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