Ali Husain - Director-Investor Relations David A. Zinsner - Vice President, Finance and Chief Financial Officer Vincent T. Roche - President, Chief Executive Officer & Director.

James Vincent Covello - Goldman Sachs & Co. David M. Wong - Wells Fargo Securities LLC Christopher Brett Danely - Citigroup Global Markets, Inc. (Broker) Doug Freedman - RBC Capital Markets LLC Craig A. Ellis - B. Riley & Co. LLC Stacy Aaron Rasgon - Sanford C. Bernstein & Co. LLC Matt Diamond - Deutsche Bank Securities, Inc. Romit J.

Shah - Nomura Securities International, Inc. Harlan L. Sur - JPMorgan Securities LLC Craig M. Hettenbach - Morgan Stanley & Co. LLC Vivek Arya - Merrill Lynch, Pierce, Fenner & Smith, Inc. J. Steven Smigie - Raymond James & Associates, Inc. Tore E. Svanberg - Stifel, Nicolaus & Co., Inc. John William Pitzer - Credit Suisse Securities (USA) LLC (Broker) C.J.

Muse - Evercore ISI Ambrish Srivastava - BMO Capital Markets (United States) Ian L. Ing - MKM Partners LLC Stephen Chin - UBS Securities LLC Vijay R. Rakesh - Sterne, Agee & Leach, Inc. Mark J. Lipacis - Jefferies LLC Deepon Nag - Macquarie Capital (USA), Inc..

Good afternoon. My name is Jennifer, and I will be your conference facilitator. At this time, I would like to welcome everyone to Analog Devices first quarter fiscal year 2015 earnings conference call. All lines have been placed on mute to prevent any background noise. After the opening remarks, there will be a question-and-answer period.

Please limit yourself to one question to ensure that management has adequate time to speak to everyone. I would now like to turn the conference over to your host for today, Mr. Ali Husain, Director of Investor Relations. Please proceed..

Great. Thank you, Jennifer, and good afternoon, everyone, and thank you for joining Analog Devices' first quarter fiscal 2015 earnings conference call. We posted a press release and relating financial schedules on our IR website at investor.analog.com and I'd encourage you to follow along as we go through our results today.

Our agenda for this afternoon's call will be as follows. First, I will provide a brief overview of our first quarter results. Then Dave Zinsner, our CFO, will review our financial performance in the first quarter and provide our business outlook for the second quarter. Then Vincent Roche, our President and CEO, will provide closing remarks.

And after Vince's comments, we'll open it up for questions. Today's call will include non-GAAP financial measures that have been adjusted to exclude special items in order to provide investors with useful information regarding our historical results and our outlook.

Reconciliations of these non-GAAP financial measures to their most directly comparable GAAP measures are included in today's earnings release, which is posted on our Investor Relations webpage. The information we're about to discuss, including our objectives and our second quarter outlook, includes forward-looking statements.

Our actual results could differ materially from these forward-looking statements as a result of various factors, including those described in our earnings release and our most recent 10-Q.

Except as required by law, we don't undertake any obligation to update the forward-looking statements made by us today to reflect subsequent events or circumstances. Therefore, this conference call will include time-sensitive information that maybe accurate only as of the date of today's live broadcast. And with that, let's get to the main program.

Revenue in the first quarter came in near the very high-end of our guidance range at $772 million, decreasing 5% sequentially and increasing 23% year over year. Communications infrastructure and consumer applications exceeded our revenue plan while industrial and automotive were about in line with our expectations for the quarter.

Revenue from communications infrastructure customers at 26% of sales decreased 4% from the prior quarter, as both wireless and wireline applications decreased sequentially. Communications infrastructure revenues increased 45% year over year and 14% on an organic basis. Consumer revenue at 12% of sales increased 1% sequentially.

Within consumer, growth in portable consumer applications offset seasonal revenue declines in the sector. Over the past several years, we have been refocusing our consumer investments around performance-centric prosumer A/V and user experience-centric portable devices.

In the first quarter, our consumer business registered its first year-over-year quarterly revenue increase in five years, growing 27% over the prior year's first quarter, which we believe is a good sign that the headwinds we were facing in the sector have abated.

The industrial market at 45% of sales performed as expected, decreasing 6% sequentially as a result of fewer business days for ADI, our customers, and our distributors in our January quarter. Compared to the prior year, industrial revenue grew 21% in the first quarter and 11% on an organic basis.

The automotive market at 16% of sales decreased 8% sequentially, as car manufacturers took their seasonal production breaks over the holiday period. The long-term trends for the electrification of automobiles remain strong, and ADI is very well positioned across infotainment, powertrain, and safety applications.

In total, our core businesses of industrial, communications infrastructure, and automotive represented again 88% of our revenue in the first quarter and have combined for 11% compounded growth over the last five fiscal years and 14% growth in our fiscal 2014.

So now I'd like to turn the call over to Dave for details of our financial performance in the quarter and for our business outlook for the second quarter of 2015. With the exception of revenue, Dave's comments on our first quarter 2015 P&L line items will exclude special items, which in the aggregate totaled $21 million.

When comparing our first quarter performance to our historical performance, special items are also excluded from prior quarter and year-over-year results. And reconciliations of these non-GAAP measures to their comparable GAAP measures are included on Schedule E in today's earnings release. So with that, Dave, it's all yours..

Thanks, Ali. Good afternoon, everyone, and thank you for joining us today. As Ali just outlined, ADI had another very good quarter. Sales in the first quarter totaled $772 million, and diluted earnings per share excluding special items were $0.63.

Gross margins of 65.6% in the first quarter decreased from the prior quarter's 66.4%, primarily as a result of lower factory utilization but were better than our plan on a better mix of business. Compared to the prior year, gross margins increased 50 basis points on a better mix.

Excluding purchase accounting adjustments, inventory on a dollars basis was flat to the prior quarter and on a days basis was 126 days on lower sales. Utilization rates in the first quarter were in the mid-60%, and we're planning to increase utilization to the mid-70% in the second quarter.

Inventory and distribution on a dollars basis was also approximately flat to the prior quarter and on a weeks basis was approximately eight weeks on lower sequential sales. Operating expenses of approximately $264 million declined $5 million from the prior quarter.

The decrease was primarily due to savings resulting from the prior quarter's restructuring action. Operating profit before tax of $242 million or 31.4% of sales decreased 180 basis points from the prior quarter but increased 240 basis points over the prior year. Other expense in the first quarter was approximately $7 million.

We expect our net interest expense to be approximately $5 million per quarter for the remainder of fiscal 2015. Excluding the reinstatement of the R&D tax credit and other special items, our tax rate in the first quarter was approximately 15%, which we expect will be our rate for the remainder of fiscal 2015.

Excluding special items, diluted earnings per share in the first quarter was $0.63, as I mentioned, near the high end of our guidance and up 29% over the prior year. At the end of the first quarter, our cash and short-term investment balance was $2.9 billion, with $740 million available domestically.

We had approximately $870 million in debt outstanding, resulting in a net cash position of $2 billion. During the first quarter, capital additions were $24 million or approximately 3% of sales. Our capital expenditure plan in 2015 is to be between $150 million and $165 million.

We have a strong financial model that generates solid cash flow, and we remain committed to returning cash to our shareholders. For the trailing 12 months, we generated $883 million or 29% of our sales in operating cash flow.

We also generated free cash flow of $729 million or 24% of sales, and returned $790 million or 108% of our free cash flow to shareholders in the form of a dividend or share buybacks. Our quarterly dividend is a very important part of our total shareholder return philosophy. During the quarter, we returned $115 million to shareholders in dividends.

In addition, today we announced that our Board of Directors has approved a $0.03 increase to our quarterly dividend to $0.40 per share payable on March 10, 2015. This represents an increase of 8% and is in line with our model to increase our dividend annually by 5% to 10%.

During the quarter, we repurchased approximately $60 million of our stock, which helped reduce our diluted share count by about 1 million shares. At the end of the first quarter, we had approximately $700 million remaining under our current board authorized share repurchase program.

So now to our outlook for the second quarter, which with the exception of revenue expectations are on a non-GAAP basis and exclude special items that are outlined in today's call and release.

After a solid first quarter, we are planning for revenue in the second quarter to be in the range of $810 million to $830 million or up approximately 5% to 8% sequentially. At the midpoint of this range, revenue would increase 18% year over year or at a high single-digit rate on an organic basis.

By end market, we expect industrial and automotive to lead our sequential revenue growth and for the communications infrastructure and consumer end markets to remain stable to the first quarter levels. We are planning for gross margins to increase to approximately 66.5% on higher utilization and a continued favorable mix.

We estimate that operating expenses will grow approximately 2% to 3% sequentially, which of course is well below the sequential revenue growth we expect to achieve in the second quarter. Based on these estimates and excluding any one-time items, diluted earnings per share are planned to be in the range of $0.70 to $0.74 in our second quarter.

While this is solid operating leverage, our utilization rates are expected to be only in the mid-70% levels in the second quarter, and we continue to carefully manage our operating expenses.

Based on our first quarter exit rate, we estimate we have approximately 500 basis points of operating leverage remaining in our financial model given that the high end of our operating margin model is 36% of sales. So to wrap it up, the first quarter was a very good start to the year.

We had a strong year-over-year revenue growth with quality earnings and cash generation and we expect an even better second quarter. So now I'll turn the call over to Vince..

Thank you, Dave, and good afternoon, everybody. As I mentioned last quarter, during these calls, I will occasionally provide additional perspective on the markets and technological trends that are driving ADI's business and the growth opportunities ahead for ADI.

Today, I'd like to give you some insights into our strategy in the industrial automation market specifically. This market is characterized by a diverse set of many thousands of customers and myriad applications with long life cycles.

Customers not only demand highly innovative products and solutions, but these products and solutions must function at very high levels of accuracy, robustness, reliability, and efficiency in very harsh operating environments.

These dynamics create high barriers to entry, making industrial automation precisely the type of market that ADI actively pursues for sustainable growth and attractive returns.

Within automation, ADI has a long heritage of providing technologies and product solutions in such areas as programmable logic controllers, distributed control systems, field instruments, motor controls, robotics, and industrial sensing.

This business has traditionally served a variety of factory and process automation customers in such areas as automotive, pharmaceutical, and chemical manufacturing and then among many others.

But today our customers' customers are responding to unprecedented challenges in an effort to remain globally competitive and boost productivity while decreasing energy costs and their carbon footprints. Our customers are focused on increasing the agility, the safety, and the reliability of their manufacturing systems.

Facing the scope of these challenges, customers are racing to re-architect their system designs and are working to transform yesterday's factory floor into the connected enterprise of tomorrow, and this transformation is showing up on ADI's bottom line.

In our fiscal 2014, sales into the industrial automation market represented about 25% of our $1 billion-plus industrial business growing 14% compounded over the last five years, far outpacing the growth of our served available market. And we were very optimistic about our continued growth in this sector. Let me explain why.

The industrial automation sector is largely about precision sensing, monitoring, control, and communication.

We have spent the past 50 years building our expertise on our brand with our high-performance precision analog and mixed-signal processing capability, where we can supply thousands of products to our many thousands of industrial customers at sub one part per million quality levels.

In recent years, we've been increasing our product development and systems engineering investment in this area. In addition to our data converter, linear, DSP, RF, and MEMS portfolios, we continue to broaden our reach with the addition of, for example, isolation products.

We are better positioned than ever to understand our customers' signal processing system needs in order to deliver more complete solutions that anticipate and address their pain points. Now I'd like to give you a couple of examples of the results of these investments.

Today, in the area of process control systems, our customers need to maintain several hundred manufacturing platforms that are hardwired and dispersed all across factory floors. Not only are these systems inefficient but they require teams of service personnel to roam the floor and manually ensure each individual system is operating effectively.

A couple of cogent examples will explain how we're changing the game here.

For example, ADI's product designers have produced a groundbreaking highly integrated software-defined signal processing solution that has the ability to reduce our customers several hundred platforms down to just a few that can be individually reconfigured with software to adapt to the various applications needs.

This helps make customer systems more flexible and agile while decreasing their maintenance and service costs. In addition, ADI's software configurable platforms enable customers to pack 50% more channels into the same or smaller form factor without performance compromise and at the highest safety and reliability levels.

Another example, more than 40% of the world's electricity is consumed by industrial plants with inefficient industrial motors consuming most of this electricity. In these applications, ADI is enabling highly precise measurement and control to enable our customers to create the highest-accuracy, efficient, and reliable motor control systems.

In these same applications, our isolation products are increasingly becoming a key differentiator for ADI, enabling machine and operator safety by isolating the electronics from high-voltage operating conditions. Also, our MEMS sensors are increasingly coming to the fore in industrial automation and are a key differentiator for ADI.

In machine health monitoring applications, for example, our MEMS vibration sensor with an embedded radio frequency transceiver enables remote monitoring of industrial machine health to detect early machine failure and to save our customers' customers from costly plant downtime.

So in essence, these are the forces driving what many of our customers call Industrial 4.0. Our customers are increasingly relying on ADI's signal processing system domain know-how, our products and technologies, and we are very well positioned to capture the opportunity and to drive revenue growth for ADI well into the future.

And so with that, we'd be very happy now to take any questions you might have on any part of the prepared remarks here..

Jennifer, can we get to the Q&A, please?.

Our first question comes from the line of Jim Covello with Goldman Sachs..

Guys, good afternoon. Thanks for taking the question and congratulations on the really strong results and guidance. If I could ask first on the consumer side, it's terrific that that – that the issues in that segment seem to have kind of played the course and don't seem like they're going to be acting as a headwind going forward.

Do you think that the resolution of the issues in that segment is more just the fact that the segments that you are letting roll off kind of fully played out or do you think you've actually gained some share in that segment that's enabling that segment now to be not a headwind anymore?.

Good question. I think it's largely a case of the headwinds being largely behind. We have been building some core technologies using some of our precision technologies, for example, to develop some new products that will come on stream in the future here particularly in the portable area.

But I think it's really a mixture of – I think as I said the headwind is largely behind us and I think we've got some tailwinds now that will propel us through the parts of our business, the two areas that we focus being prosumer, the audio/video prosumer area and the portable area where we've been, I'd say, modestly investing but doing some really exciting things that's have been and will come to fruition in the not-too-distant future here..

Terrific. That's helpful. And for my follow up, if I could ask Dave. Dave, you mentioned utilization going to the mid-60% I think next quarter.

Can you give us the range where that's been over the last couple of years kind of high and low?.

I think it's actually, Jim, it was the mid-70% for Q2..

I'm sorry..

It was mid-60% for Q1. And I'm just kind of scanning through it. It peaked out in the second and third quarter of 2014 in kind of the mid-70%. Let's see. I'm just looking in the low. It probably got down to about 50% – in the first quarter of 2013, at least, it was 50%. I'm not sure beyond before that..

So we're getting back to a pretty healthy level here in the next quarter?.

We're getting into the mid-70%. We have – I would say that in 2011 – of course that was heady times – but in 2011 we were in the low-80%.

So we certainly can operate this facility at a utilization level that's much higher than we are today and we would get obviously the incremental gross margin fall through from it so that's not out of the realm of possibility..

That's terrific. Really, really helpful. I appreciate it. Congratulations again..

Thanks, Jim..

Thanks, Jim. And, operator, before we move on to the next question, just a reminder that we'll have everyone try and keep to one question as the call will run until 6:00 and so feel free to re-queue after asking your first question. We'll get to our next caller now..

Our next question is from David Wong with Wells Fargo..

Thanks very much.

Can you give us any feel for the communications infrastructure end market by geography? Are there some regions that are relatively strong and others that are relatively weak at the moment?.

I'd say America has been strong. We're still – everybody is waiting for Europe but I think it's been really a story about America, China, to some extent Japan and Korea. We had some good strength in India as well over the last couple of quarters.

And, I think we're expecting China to continue to be reasonably strong at least for the first half of the year in the TV systems. And again, we expect a growth year this year in communications infrastructure for ADI..

Great. Thanks..

Thanks, David..

Your next question is from Chris Danely with Citigroup..

Thanks, guys.

Can you just talk about what the Hittite contribution was during the quarter and then how you expect that to play out for the rest of the fiscal year?.

Hittite was in kind of the mid-$70 million level, which was kind of consistent with where we thought it would range. Obviously, in the back half of the year, we're thinking that it's likely to be up from where it is today.

I would guess that the second quarter is going to be – given that we think communication is going to be relatively flat, I would guess Hittite is going to be relatively flat too..

And revenues there, please?.

I beg your pardon?.

Revenue, too?.

That's what we're talking about..

Okay, got you, got you, got you. I thought you were talking about margins..

Oh, no, no, revenue – yeah, that was revenue. Yeah, margins are consistent with where Hittite's margins have been historically..

Great. Thanks..

Your next question is from Doug Freedman with RBC Capital Markets..

Hi, guys. Thanks for taking my question. This is the time of year when new pricing kicks in on value purchase volume purchase agreements.

Can you give us a sense of what impact that's having on your quarter going forward if that was in line with what you've seen seasonally in the past or more or less?.

It's more or less in line, although we've taken a lot of steps around pricing to get more discipline and this year I think we did better than in years past in terms of the agreements with the key customers.

We've also really kind of scrutinized our pricing across the long tail as well to make sure it was kind of consistent with the value that we're providing and in some cases actually there was a little bit of an increase. So I think we did pretty well on the pricing side.

It was generally very stable through the negotiations and I would think through 2015 we'll have very, very stable pricing..

Great, thanks for that detail and congrats on the strong results..

Thank you.

Your next question is from the line of Craig Ellis with B. Riley..

Thanks for taking the question and nice job on the dividend increase, guys. The question is really just a clarification. You noted that there was upside versus expectations in consumer and communications infrastructure.

To what extent was it much more one or the other? And given that consumer contributed to the upside why did mix play a role in better gross margins?.

I think they were both equally as strong. I don't think there was one specific area that outshines the other. From a mix perspective, generally actually our consumer business has pretty good gross margins. They're up north of 60%, so they actually don't impact our margins as much as you might think.

And obviously, communications is above the corporate average, so that's very helpful to our gross margins. So that's generally why the mix turned out to be a positive for us this quarter..

Thank you..

Your next question is from Stacy Rasgon with Bernstein..

Hi, guys. Thanks for taking my question. I wanted to dig into the gross margin guidance just a little bit. So we've got about, I think it's 90 basis points of upside, but we have utilization going up 10 points or so from the mid-60% or the mid-70%, better mix, higher revenues. I'm just trying to figure out.

How do we think about the relationship between gross margins and utilization on a point-for-point basis? And are there any headwinds that are affecting the margin guidance as well that are offsetting some of the tailwinds that seem to be there?.

I think the general rule of thumb is usually that for every 1% increase in utilization, you get 10 basis points of gross margin improvement. We're roughly guiding in the 66.5% range. It obviously could be better. Certainly there are a lot of good things happening in the gross margin side.

And the second quarter mix is generally a bit better because industrial has good strength in it, which is what we predict. And of course the utilization should lift it up. There are always a few things that kind of can go against you. And I think given that's the case, we generally factor that into the gross margin guidance when we give it.

But like you said, it could go a little bit better. I think the fall-through on gross margins for the second quarter – Ali, correct me if I'm wrong – is 80%.

Right?.

That's correct..

And that's all also a good rule of thumb. As revenue goes up, you generally get 80% fall-through, and that tied to the 66.5% which is what we go with. But this quarter was a perfect indication that we can't exactly nail it down to the electron, to the tenth of basis point, and so there could be upward momentum depending on how things go..

Got it. Thank you..

Sure..

And, Dave, not only has the gross margin dropped through at 80%, at the midpoint of guidance, but the operating margin is also around 70% drop-through. So thanks for the question and we'll go to our next caller..

Your next question is from Ross Seymore with Deutsche Bank..

Hey, guys, this is actually Matt Diamond on for Ross. Congrats as well on the results and the guide. There has been some talk about changing seasonality in the industry. I'm curious.

From a bookings perspective, how does the current bookings dynamic compare to normal seasonal to the extent that normal really applies?.

I actually think that – I would say that the cycles seem to be less predictive at this point. But seasonally, I think things are happening as they normally happen year to year. We saw bookings obviously come down initially in the quarter, and obviously were soft through the Christmas period.

But after that, the bookings levels did ramp up in the January month. And February up until this point was quite strong. So it's consistent with – and of course that momentum happened a lot in the industrial and automotive space.

So it's consistent with the guide that our opinion is that industrial and automotive should see very good sequential growth this quarter. And there's a lot of stability around the other two end markets, consumer and communications infrastructure, which generally would be a positive indication that those will be stable through the second quarter.

And that's pretty – the second quarter generally for us seasonally is a very good quarter, and I think it's lining up to be a very good quarter for the second quarter..

Okay, great. Thank you..

Thank you..

Thanks, Matt. We'll get to our next question, operator..

Your next question is from Romit Shah with Nomura..

Yes, thank you. I was hoping you guys could talk about the M&A environment. As you've probably heard, Micro out looking for strategic alternatives. Freescale is reportedly for sale. So if you could, just talk about that. Are you guys getting pitched a lot of deals and what's your appetite these days? Thanks..

Bankers have to earn a paycheck, and so they've always been interested in pitching us deals regardless of whether it was a good environment or not. But in any event, we do have an active acquisition program in place. That was how we got to the Hittite acquisition last year.

I think for us it continues to be about, what do we think is going to be important for our customers for us to have in terms of technology, and then we look out across the universe of opportunities to see if we can find that technology and companies, be it relatively smaller or large.

And so generally, if businesses are getting shopped, I wouldn't say that incentivizes us either to do it or not to do it. Really we start fundamentally with this list of what are the things we want in our portfolio that we don't think we can do organically, and those are the things that drive us to do acquisitions.

And at this point now, nothing to talk about; we continue to survey the landscape, but there's nothing active at the moment..

Our job number one for us, Romit, is to make sure that we shelled out a significant amount of money to buy a great asset in Hittite.

We are determined to make sure that we create the leverage that we believe is available both on the top line and the margins and in terms of building up a really important $1 billion-plus franchise here for RF and microwave. So that's job number one for us at this point in time..

Then, just to that point, you've been very vocal that any potential acquisition has to be strategic, and that was one of the clear merits to the Hittite deal.

But I wonder looking at what's been done over the last year, in particular the Avago-LSI transaction, if you're more open-minded to doing something that may standout more from a financial perspective?.

We're not in the business of doing things just strictly for financial reasons. We've got to have strategic merits for us to do it..

For us, it's really about making sure that the combination of ADI and Hittite is capable of creating something greater than the sum of the parts. In other words, we can put our two pieces together and, over time, produce growth that was beyond the reach of both companies separately.

So we're well on track, I'm delighted with the response from our customers.

We have some great examples just very, very lately in fact where in the communications sector in particular, the Hittite, there's a tremendous vein of really good engineering and technology there that the customer relationships, the breadth of coverage that we have in the channel, that we're bringing Hittite now to places that we had hoped were possible to bring Hittite based on just ADI's scale, depth, and breadth.

So I'm very, very pleased so far with what I'm seeing..

Great. Thanks for the color and congrats on the great results..

Thank you..

Thanks..

Your next question is from Harlan Sur with JPMorgan..

Thanks, guys, and congratulations on the strong quarter and outlook.

On the solid industrial trends in the business, I'm interested in the regional trends within this segment here in the April quarter and what sub-segments in automation, instrumentation, healthcare, energy are you seeing strength?.

For the second quarter?.

Yes, for the second quarter..

I think our two biggest sub-markets are industrial instrumentation and automation and those we expect to have very good second quarters. Healthcare is probably going to be up a bit, but it'd be relatively modest. I think defense is probably going to be relatively flattish.

Energy management, which are smaller component, are likely to be a little bit up. Geographically speaking, obviously, the two major markets that industrial serves is the U.S. and European markets.

When we looked at the bookings levels for those two markets in industrial, that's supported a pretty meaningful increase for the second quarter on a sequential basis. So I think those two areas will be probably the ones that outshine the others in terms of performance..

Great, thank you very much..

Thanks, Harlan. We'll get to our next question, operator..

Your next question is from Craig Hettenbach with Morgan Stanley..

Yes, thank you.

On Hittite, understanding that some of the revenue synergies will take time to play out but can you give any early stage anecdotes in terms of things you're looking to do with the distribution channel or customer engagements after closing Hittite?.

There's a lot of activity. During the past three months or so, we launched Hittite into our channel. So we've gotten the attention of our biggest distributors globally and we've put more than 1,000 product SKUs into the distribution channel. So it will take time.

But the response – I've spoken with these distributors myself and the response has been very, very positive to creating leverage and expanding the reach of Hittite across the globe.

You know as well I just mentioned that we've seen some terrific evidence of deeper penetration of Hittite, particularly into some of our larger customers as well where the engagements, the combination of ADI's mixed-signal with Hittite's very, very high-performance analog, RF, and microwave technologies, that combination is starting to change the game in terms of the kinds of conversations we're having with our customers.

So for example in the instrumentation area, we've gone from competing against each other on product sockets to having a conversation about how that customer manages their frequency plan across their entire product portfolio.

One of the very large routing companies is working with us on some very advanced technologies that Hittite has brought us in particularly the cable area. So there's lots of empirical evidence that the combination of the pieces and ADI's just breadth and coverage of customers globally is making a difference there..

Got it. Thanks for the color, Vince..

Thank you..

Your next question is from the line of Vivek Arya with Bank of America Merrill Lynch..

Thank you for taking my question. My question is really on the automotive segment. So, Vince, you've done very well over the last few years, but when I look at the last two quarters, automotive sales have been roughly flat to modestly up which is somewhat different than what we have seen from the competitors.

So is this just order lumpiness? Do you think you have a complete portfolio in automotive? What will be the catalyst to turn automotive segment back to what overall company growth rates can be?.

Yeah, good question, Vivek. So automotive for ADI, 2014 was actually a strong year for automotive for ADI. We grew at three times the SAAR and have done so also over the last four years or so. So 2014 was a good year. I believe 2015 will be a growth year for ADI.

We believe that the long-term projection for this business I think we said publicly should be that we can grow this business at a minimum of twice the rate of SAAR and I think the business as has been in the past is capable of growing three times the rate of SAAR. So it's a very sizable business for ADI now. We've done well in the past.

I believe it's a terrific growth opportunity for ADI in the future. I mean that said, it's a lumpy business to some extent given that there is really probably 10, 15, 20 customers that really matter, big programs that tend to last a long time. So I think the way to look at it is that some years we will achieve 3x, some years we won't.

So – but I think overall, you've got to look at this business over the long-term. We've been increasing our investments. We've got terrific diversity now in terms of customers, products, and there's a lot of new things happening in automotive in terms of safety systems.

We've got some exciting new technologies that we've been introducing as well into the real technology purveyors out there in terms of things like noise cancellation, infotainment, powertrain. So I think the future is going to be very, very bright for the industry and for ADI..

Okay, thank you..

Thanks, Vivek..

Your next question is from Steve Smigie with Raymond James..

Great. Thanks a lot. I'll add my congratulations on a nice quarter and guide.

Dave, I was hoping you could talk a little bit about what you think the share count might look like in the April quarter or at least the magnitude of share buyback you guys might be contemplating?.

Good question. I guess I have to be somewhat of a prognosticator of what I think the stock price is going to do over the time. I mean generally speaking, if the stock is strengthening through the quarter, we would unlikely be buying. Yeah, that's the right way to say it.

Because we tend to buy when there is kind of historical weakness in the stock and when there's not, we tend not to be a buyer. So I don't know exactly what's going to happen through the quarter. I hope it actually goes up and to the right.

But the way we've modeled it is we thought that the share count would be in the kind of 316 million, 317 million range. It's possible it could go a little lower than that. It's possible it could be a little higher than that..

Great, thank you..

Sure..

Your next question is from Tore Svanberg with Stifel..

Yes, thank you, and congratulations on the record revenue outlook. Vince, I wanted to follow up on the industrial automation segment. I think you said it's grown about 14% CAGR the last five years....

Yes..

...which was a period when industrial automation sort of just scratching the surface as far as the opportunities.

So should we expect that business to potentially accelerate from that growth rate, and do you have other sub-verticals within industrial that have that same growth profile?.

Yeah, it's a good question, Tore. We've been, generally speaking, increasing R&D in the industrial space over the last several years. We've been strengthening and broadening the portfolio, the signal processing portfolio. So I think we are making our basic products and technologies more attractive to our customers, the industrial customers.

We've also, incidentally, been increasing the footprint of our field operation in terms of selling an applications resource over the last five or seven years, developing the relationships, building the engagements at the engineering level.

So I think we're in a good position in terms of products that we've got the coverage that we've got in the industrial space.

And also, our customers – as I said in the prepared remarks there, many of our industrial customers are asking us to get more involved in helping them instrument the sense to be able to create information for them and communicate information about machine health, for example.

So my sense is both in terms of the things we are doing organically as a company and what the market will enable ADI to do, it will be a bright future. I think also, in the instrumentation area with the addition of Hittite, we're able to do new things in the microwave sector and instrumentation, in aerospace and defense, for example, as well.

And I think everybody is expecting a lot from the energy sector and it's been lumpy.

It's based on regulation and government mood and so on and so forth, but it's an area where we've got some good technology on the metering side, on the communications side, and we have a broad portfolio of products that sell into the transmission and distribution of electricity as well.

So – but I think in terms of being able to create leverage here I think automation is going to be strong for ADI, particularly strong, and as I said the high-frequency part of instrumentation I think is going to be good for the company as well..

Very helpful, thank you..

Your next question is from John Pitzer with Credit Suisse..

Yeah, good afternoon, guys. Thanks for letting me ask the questions and congratulations on strong results. Relative to the guidance in April, if industrial and consumer is sort of stable/flattish Q-on-Q, it means the other two buckets – I'm sorry industrial and auto need to grow about double-digit sequentially.

I'm just kind of curious is one bucket growing faster than the other? And I hate to use the word normal seasonal, but would you characterize double-digit sequential growth in the April quarter as normal seasonal or are there other drivers like content growth that you think is starting to kick in at the April timeframe for those two buckets? Thanks..

You're correct in that's roughly what has to happen. I think that the industrial business will, on a percentage basis, do better than the automotive business sequentially. And actually I think there is – it's hard to gain a lot of share in industrial in a quarter.

This is a business that doesn't move quarter-to-quarter, it doesn't even move year-to-year in a lot of cases. So if you look at the sequential growth rate in the 2014 second quarter, I think industrial grew at about 13% sequentially and that's been kind of the range of what we're probably talking about for industrial for this second quarter.

So it's basically seasonal. We'd like to believe that we have invested a lot in automotive and in the industrial space. We've moved a lot of R&D away from some of the more high-flying consumer opportunities and into these areas over the last five or six years.

So all of that takes time to get traction, and I do believe that 2014 and at least how things are lining up for 2015 for those markets, does indicate that we've got some momentum in these businesses and that the fruits of the labor of all this R&D investment that we've made over this five-year period is starting to pay off in terms of revenue design wins, design-ins and so forth..

Helpful. Thank you, guys..

Sure..

Your next question is from C.J. Muse with Evercore ISI..

Yeah, good afternoon. Thank you for taking my question. Dave, in your prepared remarks, you talked about 500 bps remaining in terms of operating leverage.

Curious if you could talk a little bit about your underlying assumptions there in terms of what kind of top line mix utilization you require to get to that kind of number?.

I mean the margins of these businesses – of course there has been some mix impact quarter-to-quarter in terms of the impact to gross margins, but I think largely they're fairly close to each other. I don't think we have to rely on one business doing better than another business in order for us to kind of hit the targets.

Our goal is to get to 68% gross margins.

And given that we're 250 basis points below that, I guess, at this point, 250 basis points of the 500 basis points is going to come from just gross margin leverage, which is largely going to be a function of, we believe, factory utilization, a higher top line- over some fixed overhead expenses, and just a laser focus on this in terms of pricing discipline and cost discipline.

And I think we've been able to do a fairly good job in both of those areas over the last couple years to improve the gross margins beyond where they would've been.

And then the rest is obviously trying to get the operating expenses down a couple hundred basis points as a percent of revenue and that will get us the rest of the way there to get us our 500 basis points of improvement. I don't think it's going to happen next quarter. Obviously, I don't know that it happens next year necessarily.

But I think in a fairly stable environment with some growth like we think we can do over the course of four or five years, I think we'll have a very good steady march towards improving that operating margin leverage that we talked about..

Very helpful, thank you..

Sure..

Your next question is from Ambrish Srivastava with BMO..

Hey. Thank you, guys, pretty solid execution here. Just on order trends, Dave, is there any difference in European order trends at the distis versus here given the currency upheaval that we are seeing? Thank you..

You mean orders from distributors on us you mean?.

Right, right, given that they are sitting on depreciated currency..

Obviously, the currency moves around a bit. We transact mainly in dollars. And so sometimes they get a windfall in terms of gross margins; sometimes they don't.

But their business is shipping our product and so they're going to need to hold the inventory to be able to do that, and we don't think they're going to adjust their inventory behavior based on some FX perturbations..

And then your earlier response you did say – I just want to make sure I got it right. For the guidance, you did say that you expected both European and the U.S.

geos to be strong? Correct?.

Correct..

Okay, thank you..

Your next question is from Ian Ing with MKM Partners..

Thanks for taking my question. Communications segment down only 4%. You thought it could underperform the other three segments. I'm just trying to understand how your comms business can outperform FPGAs. You've heard Xilinx talk about a flat to low-growth environment they're facing this year, and your converters do often sit next to FPGAs.

I'm just trying to understand the source of the outperformance..

This is another area where we've been investing heavily in increasing ADI's reach across the radio subsystem over the past number of years.

So as we've said several times, our content from generation to generation has grown, and that is the case in, for example, 4G today as well where we're getting somewhere between 20% and 30% more BOM value per 4G radio subsystem. And also ADI in terms of diversity of that radio application is stronger today than it's ever been..

Helpful, thank you..

Your next question is from Stephen Chin with UBS..

Thanks for taking my question, another one on geographic demand, if I could.

Relative to Japan and China, could you talk a little bit about how the order trends are looking in those two geographies, especially in the industrial end market? Is it still in correction mode, or do you sense a trough coming anytime soon? And also any foreign exchange related impact to longer-term orders, especially in Japan? Thanks..

At this point, we're not seeing any impact from FX changes. I think in general, industrial – again, it has a pretty good second quarter, so I'd expect those businesses to do okay. I think we have generally – I don't necessarily remember how it breaks down by segment. But I think in total, we expect China and Japan to be relatively flattish.

So my guess is industrial does a little bit better and some of the other markets probably do a little bit worse, and that nets it out to relatively flat..

Okay, thank you..

Your next question is from Vijay Rakesh with Sterne, Agee..

Good quarter here. Just on the automotive side, can you talk about which segments you are seeing strength in automotive? And also geographically what's your exposure in automotive? Thanks..

Geographically, we're probably more concentrated at the European automakers to start with, and then a close second is the U.S., followed probably by Japan and Korea at equal levels.

The strength I think for the second quarter on a sequential basis, my guess is that we'll see strength across all three of our sub-segments, infotainment, safety, and powertrain. I don't think any particular sub-segment is going to do necessarily better than any of the others..

Great, thanks..

Your next question is from the line of Chris Danely with Citigroup..

Thanks.

Just for round two, can I sneak in two quickly?.

Yes, go ahead..

You talked about the end markets.

Can you just maybe give us a sense of the ranking of end markets you expect as far as growth goes for the calendar year? And then also, would you characterize your overall environment as better than seasonal? And what do you think the drivers of the better than normal seasonality would be, if it is like that?.

Better seasonal for the year you mean or....

Would you characterize like the current orders environment as a little bit better than normal environment?.

That's the same question I thought we got a little bit earlier, but I think that it's generally pretty seasonal in terms of the order flow. And then as far as we rank the end markets, it's a little early to be able to try and do this but I think all four markets will likely grow this year..

I would hope so..

Now we obviously get a lift in the industrial and communications markets by virtue of the fact that we have Hittite in there. So obviously they're likely probably to do better than the other two because they get a full year's effect of Hittite versus one quarter's effect of Hittite that we had in 2014.

And then consumer is probably the next and probably auto is going to be the slowest this year..

Okay, that's perfect. Thanks, guys..

Your next question is from Doug Freedman with RBC Capital Markets..

They're all recycling..

We're coming back in, just one more for you. I know you guys have been working on improving some of the margins in the MEMS business.

Can you give us where you're at in the progress of that program?.

On the baseball analogy, I would say we're in the second or third inning. We do have some products that are starting to come out that carry better margins. Obviously, they take some time to get traction.

My guess is that traction doesn't happen until late in 2016, maybe 2017, and that will be an inflection point for us in terms of improving gross margins. We're obviously focused on the cost side of the equation as well and we've made steady progress.

So margins are improving, but they still have a ways to go to get to where we think they'll be acceptable..

What percentage of sales should we characterize MEMS as now?.

It's in the mid-single digits I think..

Great. Thanks again..

Your next question is from Mark Lipacis with Jefferies..

Thanks for taking my question. Dave, I think this one is for you. Accounting Bulletin 606 on revenue recognition, it seems like it's effectively trying to eliminate sell-through revenue recognition and it's already causing some companies to rethink there – how they recognize their revenues.

Have you guys looked at this? And if so, can you tell us how you think this may impact you guys and when you might expect to implement it and would it cause you to recognize a big chunk of the $280 million in deferred revenues in one quarter? Thanks..

That's the first time I've ever gotten an accounting question, I think. I feel so honored. Yeah, the – we are aware of the Bulletin. It does seem to indicate that at some point down the road the sell-through way of recognizing revenue might go away.

I think in a couple of years – I'm not even sure what year this all starts to come about – I think it's like 2017, 2018. So we have a ways to go before we have to worry about it. I'm not even sure whether you kind of restate history and then as if you had never done revenue recognition on a sell-through basis. So we will have to see how that goes.

It's quite a few years away, though, so we haven't spent a ton of time worrying about it..

Mark, for ADI, I'd say it's probably effective in our fiscal 2018 here, so we've got plenty of lead-time here to deal with it..

Fair enough, thank you very much..

And if there is, like, some one quarter kind of impact, what we'll do is we'll provide some sort of pro forma schedule so that it's very easy to tell how we've done from quarter to quarter so it doesn't cause an issue..

Sounds good. Thanks..

Sure..

Thanks..

Your next question is from Deepon Nag with Macquarie..

Hey, guys. Thanks for taking the question.

Could you talk about how the tax synergies with Hittite are progressing and, longer time, how are you guys thinking about balancing your needs for onshore cash with a falling tax rate?.

The tax structure of Hittite is now kind of fully integrated with our tax structure. At this point now, we're pretty much realizing effectively a lower tax rate for Hittite. There's probably a little bit more that will fall through by the time next year rolls around, but I think for the most part the big step function improvement has already happened.

You are right, we constantly balance U.S. kind of cash flow needs and international cash flow needs over time. I think we have plenty of cash in both locations and certainly plenty of liquidity beyond the cash that we have on the balance sheet.

I think to be able to manage both entities effectively without kind of a meaningful adjustment to our tax rate in the event that one particular entity needs cash and the other can provide it there may be some cash flow that moves from one location to the other and that would have some effect on the tax rate but it'd be relatively minor and I don't think would have a big impact on earnings..

Great. Thanks.

And if I could sneak one quick one in on small cells, just how design traction of that business and how we should think about that as a percentage of your revenue over the next couple of years?.

Yeah, well, the design activity has been tremendously successful for ADI. We've been working hard on building a set of transceiver technologies that are highly integrated in terms of the RF and the mixed-signal chains. And as I said, we've great design in coverage across the globe.

And it's my expectation that somewhere in the late part of this year into next year we'll start to see it become a meaningful portion of the business assuming that the rollouts take place at the rate we expect.

It's hard for me to give you an exact prediction in terms of what proportion of our revenue, but I think it's true to say that from what our customers are telling us and what the carriers believe that the deployments will begin in the second half of this year in earnest some time. So when they happen, we'll benefit very, very well I believe..

That's great. That's all I've got..

And I would just add, Deepon, on the small cell thing. A lot of times it comes down to the definition of what's a small cell versus what's a macro. The miniaturization of the macro base station has been happening for several years. In fact, I think if you look at the stats on some of these macros, they're actually placed about 50 meters apart.

So do you call that a macro or do you call that a small cell? But in any event, I think our sense is that the small cells in the back half of 2015 should start to layer on top of what we're doing on the base station on the macro side. So overall, it should be a good year for us in comms infrastructure. So with that, let's get to our next question..

The next question is from Vivek Arya with Bank of America Merrill Lynch..

Thanks. Just a quick one. I believe, Dave, in response to a prior question you mentioned Hittite was about mid-$70 millions in Jan and you expected it to be sort of flattish in April. If you could clarify that. And just on a like-to-like basis, how should we think about the growth at Hittite in fiscal 2015? Thank you..

Actually, now to think about it, the industrial business is likely to have a pretty good second quarter, so I probably – I was thinking about it from the comps perspective, but yeah, so of course the industrial will go up. So I guess sequentially Hittite will be up in the second quarter versus the first quarter.

And then what was your second question, Vivek?.

Yeah, just for the full-year, conceptually from the time you acquired Hittite and where you expected the growth rate to be.

Now that it's been under your belt for a couple quarters, how are you thinking about full-year growth trends for that acquisition?.

It's going really well. I think the likelihood is that this thing is going to grow kind of in the double-digit range and that was what it had been consistently growing at for a while. It had a couple years just like everyone else where it wasn't doing that, and then it turned around and started to do pretty well.

So that's pretty consistent with what we thought. I mean it wasn't too terribly different than where we thought things would end up.

I'm very excited, as Vince pointed out, that there is a whole bunch of new designs that Hittite was unlikely to have gotten had they not been part of the ADI portfolio, and Hittite has actually helped us in some cases win some business on the signal processing side that we wouldn't have ordinarily had gotten had it not been for having the microwave capabilities.

So the business is performing at least as good as we thought it would, but I think that the revenue synergies that we'll get over the long-term are going to do much better than we thought we would going into the acquisition..

Thank you..

Sure..

Your next question is from Craig Ellis with B. Riley..

Thanks for taking the follow up, guys.

Back to the consumer segment, with the re-tooled product portfolio, is the consumer business now a business that can grow on par with the rest of ADI's businesses? And if not, is it north or south, and what kind of visibility do you now have in that business? Is it short-term, a quarter or two or is it longer-term with the mix of applications that you now have exposure to?.

I think it grows at the levels of the rest of the business now. Thankfully not a headwind. Of course consumer is a little bit lumpier so there may be years where it does did better than that, years where it does a little worse than that. But I think in general that business should grow around the corporate average..

Just add to what Dave has said there, Craig. So we're not interested in a business as you know that hasn't got legs to it over the long-term. We like sustainability, we like diversity, we like good returns.

And I think in the consumer area, we've been very, very clear that with our customers, give us the problems that are really, really hard to solve, and those are the problems we've been getting.

Also, not just one generation at a time, we are building this business, albeit the innovation cycles are, they're short, they're very, very rapid but as best we can, we are able to see at least a couple of generations out from the existing solution, if you like.

So we are trying to apply our algorithm, if you like, for the rest of ADI where we're trying to build a long-term view in the spaces, a few targeted application spaces particularly in the portable area, as Dave said, where we think we can get good sustainable growth over the longer-term..

Thanks for the color..

Your next question is from the line of Tore Svanberg with Stifel..

Yes, just a quick follow-up. Dave, you guided OpEx to be up 2% to 3% sequentially which is sort of half of the rate of your top line growth.

Is that how we should think about OpEx growth for fiscal 2015 as well as sort of half of your revenue growth?.

For the total, you mean?.

Correct..

Yeah, and I haven't quite done the math but I think in general what we're trying to do is have it average around what the fourth quarter of 2014 was. So I think the fourth quarter of 2014 was about $270 million and so we're roughly thinking we'll average that over the course of the four quarters of 2015.

So that probably does have the effect of half the rate of revenue growth but I guess it obviously depends on what the revenue growth rate is and I'm unable to predict beyond the second quarter what that's likely to be..

That's very good. Thank you..

Okay, thanks..

All right, Tore, well, thank you. And I'll throw it back over to Vince to close out the call..

Well, thanks, everybody, for the questions on the call here and hope you are as excited as I am about the results and the future of ADI. We continue to focus our investments on profitable, diverse, and sustainable markets where, as I said just a while ago, there are tough problems that need to be solved and where the barriers to entry are high.

We also have a culture. We just turned 50 by the way and what has sustained this company over the 50 years and will bode very well for the company in the future is that we've got a culture that's driven by innovation, excellence in everything that we do, and a real passion for solving the deepest challenges that our customers are dealing with.

And it's my sense that this will be a great business for many, many decades to come. So once again, thanks for listening in, and we look forward to speaking to you at an upcoming conference or at next quarter's earnings call..

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