Good morning, and welcome to the Analog Devices Fourth Quarter and Fiscal Year 2016 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. Ali Husain, Treasurer and Director of Investor Relations. Sir, the floor is yours. .

All right, great. Thank you, Jennifer. Good morning, everybody. Thank you for joining ADI's Fourth Quarter and Fiscal '16 Earnings Conference Call. You can find our press release, relating financial schedules and the investor toolkit at their usual spot at investor.analog.com.

And specifically, about the investor toolkit, it's something we post on our website 2 hours before the earnings call, and it's actually a pretty good summary of our prepared remarks. So for those that are interested in kind of getting the early scoop, that's probably a good place to go as we file our press release..

With me on today's call are ADI's CEO, Vincent Roche; and ADI's CFO, Dave Zinsner. .

Before we start, let's do our disclosures. Please note, the information we're about to discuss, including our objectives, outlook and the proposed acquisition of Linear Technology Corporation, includes forward-looking statements.

Actual results may differ materially from these forward-looking statements as a result of various factors, including those discussed in our earnings release and our most recent 10-K.

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

Our comments today will also include non-GAAP financial measures, which we have reconciled to their most directly comparable GAAP financial measures, in today's earnings release, which we've posted at investor.analog.com. .

And so with all that behind us, let's get started. And I'd like to turn the call over to Vincent Roche, our CEO. .

Thank you, Ali, and good morning, everyone. By almost any measure, ADI had an excellent fourth quarter. To put it in perspective, we achieved record revenue of $1 billion, expanded operating margins to a record 38% of sales, and we generated record free cash flow margins of 44%.

Throughout fiscal 2016, as you know, caution and uncertainty were the norm across the world. Nevertheless, we executed well in a tough business environment, investing and positioning ourselves for future growth while remaining disciplined and making smart investment trade-offs. .

All told, the actions we took during the year drove free cash flow margins to 33.7%, a 520 basis point improvement over the prior year, and I'm very proud of the stellar execution by our entire team..

For ADI, it starts with an obsession for customer success, and I personally spend, as you know, a lot of time talking to and listening to their needs. It's obvious to me from these conversations that ADI is an exceptional company, and we are more relevant to our customers than ever before.

What is also clear is that our customers are seeking true innovation partners as they grow and evolve their businesses in the midst of unprecedented levels of complexity, at the same time, our customers' hardware engineering talent to stretch thin.

As a result, they're increasingly focusing their design efforts on systems and software, while turning the analog design challenge to ADI, where we have economies of scale and of scope.

With the analog design challenges said to become even more complicated and critical in the area of IoT and Industry 4.0, for example, helping our customers bridge the physical and digital domains is -- in mission-critical applications will, we believe, create tremendous opportunities for sustainable, profitable growth for ADI long into the future..

Customers choose us because we've been at this craft for over 50 years now, and in our industry, brand matters. The ADI brand is synonymous with high quality and high performance, and our customers rightly, have full faith that ADI will support them today, and well into the future.

We have demonstrated an unwavering commitment to innovation that creates economic value for our customers by investing strongly in our own business. Since the Great Recession, ADI has invested $4 billion in research and development alone, primarily in the B2B markets of industrial, automotive and communications infrastructure.

We've also made investments in quality, manufacturing, supply chain and field operations because being able to effectively and efficiently deliver high-reliability innovation and customer support is just as important as the innovation itself..

In addition to these organic investments, we've been acquiring capability that not only builds our technology base but also enables ADI to move up the value stack.

During the year, we announced the proposed acquisition of Linear Technology, which, once complete, will create a high-performance Analog leader, with the combined company having a top 2 market share position across all the key building blocks of the analog market, namely data converters, power management, amplifiers, interface and high-performance RF and microwave.

Once the transaction closes, we will have the ability to meet all of our customers' analog and mixed signal needs in sticky, long-life cycle, high-value applications in the industrial, automotive and communications infrastructure markets. .

During the year, we also acquired some very interesting early-stage technologies, which we believe will help ADI move up the value stack, as we say, over time. The acquisition of SNAP Sensor gives ADI the ability to provide our customers with very high dynamic range imaging capabilities, important in Smart City applications, as an example.

For smart factory applications, we acquired Innovasic, a developer of deterministic Ethernet switching and software solutions to extend our reach in this core market.

We also acquired the Cyber Security Solutions business of Sypris, giving ADI the ability to provide customers with a trusted sensor-to-cloud solution, with security right down at the node.

And just recently, we announced the acquisition of some exciting LIDAR technology from Vescent Photonics that will enable ADI to develop a true, solid-state scanning LIDAR system, complementing our existing radar-based ADAS offerings, and these things are very important in autonomous driving applications..

The investments we've made and continue to make are helping create economic value for our customers, and I'd like to share a few examples of where ADI's technology is making a real difference.

In the automotive space, our recently announced A2B audio bus structure provides vehicle manufacturers with high-end, in-cabin audio fidelity while reducing vehicle weight. We estimate that our solution helps save car manufacturers approximately $30 per vehicle in combined CO2 taxes and fuel efficiency. .

In the area of factory and process automation, our software configurable input-output solutions are solving significant channel density, physical space and terminal challenges, while reducing system complexity and installation and wiring costs.

And in the health care arena, ADI's vital signs monitoring products are bringing clinical-grade care into the home, enabling high-quality remote patient monitoring that reduces or even eliminates the need for and cost of a hospital stay. Ours is a customer value creation journey, 51 years in the making.

We have the intellectual capital, and more importantly, we have a talented, passionate and engaged team at ADI to help serve our customers' needs today and well into the future. The combination with Linear Technology represents the next phase in this value creation journey.

With our market-leading product portfolios tied to attractive markets, we believe we can create a free cash flow engine that will be unmatched in our industry and help provide investors with an attractive combination of growth and shareholder value for many years to come..

So with that, I'd like to turn the call over to Ali for details on our performance by end market in the fourth quarter. .

Great. Thanks, Vince. So digging deeper into our results by end market, the industrial market at 39% of revenue, increased 6% sequentially, a very strong result in what is typically a weaker period for the industrial business. .

Revenue from our broad base of small- and medium-size customers was better than seasonal and in fact, increased sequentially, and the expected rebound in the aerospace and defense sector is also pretty strong.

And our health care business also posted record quarter as we are now beginning to see the early returns from our investments in the health care sector.

And compared to the prior year the industrial market showed actually pretty considerable strength, growing 8% over the prior year, and it was broad-based strength across all of the industrial sectors as we compare the year-on-year performance..

The automotive market at 14% of revenue increased 5% sequentially, and that was broad-based growth across, really, all sectors within this market, but I'd say, more importantly, automotive revenues increased 7% compared to the prior year. .

Communications infrastructure sales at 17% of revenue decreased slightly from the prior quarter. Both wireless and wireline application revenues decreased slightly sequentially but increased compared to the prior year, led by growth in 100-gig-plus optical networking applications.

The consumer market at 29% of fourth quarter revenue increased 58% sequentially and decreased 7% compared to the prior year, with both sequential and year-over-year results, largely due to portable consumer application sales. .

So now, I'd like to turn the call over to Dave for details of our financial performance in the fourth quarter and in fiscal '16. With the exception of revenue, Dave's comments on fourth quarter and fiscal '16 P&L line items will exclude special items, which, in the aggregate, totaled $39 million for the quarter.

Reconciliations of these non-GAAP measures and our calculation of free cash flow are on schedules E and F in today's release. So with that, Dave, it's all yours. .

Thanks, Ali. The fourth quarter was once again a very strong and profitable quarter, and we set records for revenue, operating margin, free cash flow generation and earnings per share..

Revenue in the fourth quarter totaled $1 billion, and diluted earnings per share was $1.05. Gross margins of 66.6% increased 60 basis points from the prior quarter and included a 120 basis point benefit relating to the sale of previously reserved portable consumer application inventory.

Excluding this item, gross margins were in line with guidance, decreasing 60 basis points from the prior quarter due to mix..

We continue to tightly manage inventories, and as a result, inventory on a dollars basis in the fourth quarter decreased $16 million sequentially, and inventory on a days basis decreased 17 days to 105 days. Weeks of inventory and distribution were slightly below 7 weeks and were at the leanest level in 6 years..

Operating expenses increased 3% sequentially, lagging well behind the 15% sequential increase in revenue. As a result, operating profit hit a record 38.1% of revenue, expanding 400 basis points sequentially and 220 basis points over the prior year. .

Other expense in the fourth quarter was approximately $20 million. Our tax rate in the fourth quarter was approximately 10% as we adjusted our full year tax rate to approximately 11%.

Excluding special items, our business delivered strong operating leverage even with low utilization rates, and diluted earnings per share grew 28% sequentially to the $1.05 per share, which was almost twice the rate of sequential revenue growth. .

We had a record cash generation quarter, with free cash flow margins of 44%, expanding 600 basis points compared to the year-ago period. Capital additions during the quarter were $41 million, and we expect fiscal 2017 capital additions to be in the range of $125 million to $145 million..

During the quarter, we paid $130 million in dividends, and our long-term financial model incorporates annual dividend increases of 5% to 10%. At the current stock price, ADI's dividend yield of $1.68 represents a dividend yield of approximately 2.5%, although maybe a little bit lower, now that the stock rose today. .

Now I'll take a moment to talk about our performance in 2016. Revenue of $3.4 billion was stable to the prior year, and non-GAAP diluted earnings per share decreased 3% from the prior year, primarily due to lower gross margins and higher interest expense, ahead of the Linear Tech deal close.

The lower gross margins for the year were primarily the result of a very deliberate and disciplined inventory management program that reduced inventory on a dollars basis by $36 million or 9% and, on a days basis, reduced inventory in the fourth quarter by 9 days to 105 days. .

Nevertheless, gross margins remained relatively stable to the prior year as we minimize the impact of lower factory utilization rates through pricing and cost efficiencies. The good news is that inventory levels are now in excellent shape..

All told, fiscal '16 free cash flow margins expanded by over 500 basis points to 34%, setting a new company record. During the year, we also returned almost $900 million or 77% of free cash flow to shareholders via dividends and share buybacks. Of course, the biggest news of the year was the proposed acquisition of Linear Technology.

To date, we've received regulatory clearances in Israel, Germany, Japan and the United States, and we now expect the transaction to close by the end of our second fiscal quarter of 2017..

Our integration planning teams are hard at work, and we're very pleased with their progress. Vince has put me in charge of the integration effort, and I'm confident that our combined company will be greater than the sum of its parts..

We expect the transaction to be immediately accretive to non-GAAP EPS and free cash flow and for accretion levels to increase, as we begin realizing the planned $150 million of annualized run rate synergies within 18 months of the transaction close. .

During the quarter, we also made good progress on financing the transaction, locking up a $5 billion term loan facility. Based on our current expectations, we anticipate the all-in coupon rate related to the financing to be approximately 3%..

So now turning to our outlook and expectations for the first quarter of fiscal 2017, which, with the exception of revenue expectations, is on a non-GAAP basis and excludes non -- or known special items that are outlined in today's release..

Order rates are currently stable across our business as we enter the seasonally slow January quarter. As a result, we expect revenue in the first quarter to decrease sequentially, and be in the range of $840 million to $900 million but to grow 9% to 17% over the prior year.

With inventory levels and utilization rates in good shape, we anticipate gross margins in the first quarter to be between 65.5% and 66%. We expect operating expenses in the first quarter to increase slightly sequentially and for operating profit before tax to be well north of 30%.

We're planning for our tax rate to be approximately 11%, which is our planned non-GAAP rate until we close the Linear transaction. .

In total, excluding special items, we expect diluted earnings per share in the first quarter to be between $0.68 and $0.78, which would represent year-over-year earnings per share growth of 21% to 39%. .

This was a great quarter for the company, and we're very proud of our achievements, but as Vince always says, we should be often pleased but never satisfied. It is our job to make sure that we continue to exceed expectations. Our customers, employees and shareholders would expect nothing less, and neither do we. .

So with that, operator, let's open up the floor for questions. .

All right, Jennifer, so we'll get to questions in a second. [Operator Instructions] We're running this call until 11:00, so I think there's plenty of time to get to everyone's questions. So Jennifer, I think you've got the instructions. .

[Operator Instructions] Our first question comes from Ambrish Srivastava with BMO. .

I know the rule, but I had a quick fact check for Dave, and then I had a longer term for Vince. Dave, and I apologize if I'm missing it, usually, in your prepared press release, you do give the end market breakdown for the coming quarter. I don't think I saw it this time. .

Yes, maybe we ordinarily do. Okay. We'll give you 2 questions, Ambrish. I would say, just kind of directionally, the B2B businesses, which we would consider industrial, automotive and communications, will roughly be down mid-single digits. And of course, consumer, I think, would be roughly in the 30% down range in that.

What was your other question, Ambrish?.

Yes. For -- my other one was a bit of a longer term for you, Vince. And this is going back to a conversation you and I had a while ago. I know you've been on a path to transforming ADI, and you've talked about inorganic as well as organic and thinking more of a value creation as opposed to what we are used to, design in, design out.

You kind of showed it in the consumer side so far that you're not a one-socket win. But give us a perspective of where we are. And I know baseball season is over, and I love cricket, but cricket is a bad analogy. There's only 2 innings. So where are we in that transformation, Vince? And just help us with that perspective. .

Yes. Thanks, Ambrish. Good question. So look, we're on a journey. We believe -- we said several years ago, we believe that there's enough impetus in our business and that we had the balance sheet as well to help us get this company towards $4 billion to $5 billion in sales in a reasonable period of time. And we are well on track.

I believe, over the next several years, we'll be updating -- obviously, when we integrate LTC, we'll be updating all the benchmarks around what we expect revenue to be over time, profit, free cash flow, and so on, so forth. So I don't know. I'm not a cricket fan at all, Ambrish.

I don't know cricket, and I'm only an amateur in terms of understanding baseball. But I would say, we're still in the probably -- in probably the first quarter of the transformation. So we have... .

Okay. That's football. .

We have many, many years of upside. As I said, what makes me very optimistic about this business is that the analog domain essentially sets the performance for all the systems that make up this massive information communications technology sector. It's one of the foundational technologies. Our customers are asking us for more, more, more.

And we are getting to the point now, where we can be very, very choosy about the problems that we solve, and we can solve those problems across the board from microwave to mix signal to digital signal processing to power, sensor technologies. So I think there's a huge innovation upside. That's the root of this company.

We're in a better and better position with our customers. So I'm very optimistic that we can get this business well beyond $5 billion in a reasonable period of time. .

Your next question comes from Tore Svanberg with Stifel. .

Dave, can you remind us where utilization is right now? And what are your plans for the next quarter? Obviously, you've done a great job bringing the inventory days down, but kind of as we look forward from here on, how should we think about utilization and inventories?.

Good question, Tore. So utilization was in the kind of high 60s in the fourth quarter. I would expect it to be roughly in that range in the first quarter, which is somewhat atypical for us for our first quarter because, generally, we're working our inventory back down in the first quarter.

And with industrial usually having a sequential decline in the first quarter as well, it generally drives our utilization down a bit. But given that we have done so well, or I guess, the operations group has done so well in terms of managing inventory this year, we can keep utilization a little bit higher going into the first quarter. .

Your next question comes from Tristan Gerra with Baird. .

Related question on the gross margin guidance when we adjust for the sale of previously reserved product. You had a sequential trend in gross margin guidance that's better than seasonal, and you just mentioned the utilization rate being better than what you would see typically in the fiscal quarter.

Is there anything else in terms of mix that also has an impact on gross margin, maybe some weakness in base station or anything else that you could give us color on?.

Yes, no, I think it's generally utilization that's going to drive it, because, in reality, mix on a year-over-year basis is actually a little bit worse, because, if you remember, the first quarter was a pretty difficult quarter for us with regard to consumer, came down quite a bit. This year, it won't have as dramatic a decline.

And so mix is a little bit negative, but utilization will offset. And I'd say the other thing, just anecdotally, is the operations group has done a very good job on the spending side, just really managing the expenses there. And so we've incrementally, I'd say, every year, been doing a bit better in terms of spending.

And then on top of that, there's obviously, as I think I mentioned in the prepared remarks, we've been focused on pricing as well. And so I think those things have just had an incrementally little bit of a benefit every quarter. And then, of course, utilization drives a lot of it, and the offset would be mix... .

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

On industrial, and understanding it's a big macro overlay to industrial, but nice to see the broad-based strength, can you talk about, Vince, just maybe some of the applications or product that you're excited about in terms of where you're seeing some investment by your industrial customers?.

Yes, I mentioned in the prepared remarks there, Craig, for example, in our core businesses, like robotics, for example, there's a need to be able to push the speed and the accuracy of these robots to ever higher levels. That's a tremendous digital signal processing challenge.

And we've been building complete solutions that are only coming to fruition now for that area to enable much higher speeds in the operation of the robots with lower power, much greater accuracy. So it's complete signal chain of digital signal processing technology and mixed-signal technology.

I mentioned in the prepared remarks as well some of these software-defined input-output structures that are enabling our customers to deepen the penetration of sensors into their environments and to dramatically reduce the complexity of installation and the costs. Energy is another area.

It's a slow burn market, but it's an area where we have tremendous technology in transmission and distribution and also in the metering of energy. So those are just a couple of areas. And I should say as well, we combined -- we just lump healthcare into the industrial sector as well.

And we've seen this is a market where we've been investing, I would say, modestly but very determinedly over the last 7 or 8 years, and we're beginning to really see the returns come good there in terms of revenue and profit. So I'll give you an example.

We -- using integrated silicon photonics and signal processing technology, we've changed the way our customers can implement CT scanning and digital x-ray. We're bringing clinical-grade vital signs monitoring beyond the hospital into the clinic and the home. So those are all things that are making a big difference to ADI.

I should point out, by the way, as well that we're on a quarter -- we're on a $0.25 billion run rate now with our health care business, with very, very good profits and a good outlook. Again, it's a slower burn business, but it's a terrific bet for the future for ADI. .

Your next question comes from Chris Danely with Citigroup. .

I'm going to ask the Trump question since I get it 5 or 6 times a day.

So who knows what this guy is going to come up with policy-wise, but maybe if you can just share with us your sort of thoughts on how you think this impacts you, what your concerns are, what you think any positives could come out of it for ADI and the industry? Any thoughts there would be appreciated. .

Well, it's a good question. But we're getting into our 52nd year now as a company. So we've gone through many regime changes across the world and many, many -- how many American presidents is that. So I think let's just wait and see. We don't know. We hear -- like everybody else, we hear the rhetoric.

We've yet got to see what the policy's going to look like. But maybe on the margins, it'll be good, at least for the American business environment. .

Your next question comes from Amit Daryanani with RBC Capital Markets. .

I guess, I just want to go back to the Linear transaction for a second. You've had more time to I think go through this and review this.

I'll say the number one question we tend to get is just how much of -- what sort of manufacturing optimization savings could you get from the transaction over time? And what sort of upside would that yield versus $150 million you've talked about? So anything you can talk about just manufacturing integration optimization you can do, and if that would be incremental to what you've talked about?.

Thanks, Amit. That's a good question. Let me start, though, since you asked it -- opened up the Linear question. Why don't we just start at the beginning -- at the top here. We've actually spent the last several months really focusing on how the integration will go as of day 1.

I would tell you that where we have gotten a lot more optimism is around the revenue side. We were already coming into this, and this is the reason you do an acquisition like this is to get revenue synergies. We're already coming into the acquisition thinking that we would get hundreds of millions of dollars of revenue upside over time.

Of course, it takes a while to get that kind of revenue upside, but eventually. I would say that we're even more optimistic about getting revenue synergies. The teams have sat a number of times and talked through where there might be opportunities for the combined company to really address markets and deliver products that we hadn't in the past.

And that -- the fruits of those conversations have been very, very positive. On the manufacturing side, I think that right now, we're going to go in with the footprint that we have. And what we do and what we've always done is optimize that to our needs. And we'll continue to look at it.

So I don't know beyond -- I think we had roughly thought that there's about $50 million of manufacturing synergies through purchasing power and so forth. Whether there'll be more, several years down the road, we'll just have to wait and see. But for now, I would call it about $50 million.

And then we expect there's probably another $100 million of OpEx synergies. There's a lot of early wins that we've identified through the efforts in planning the integration to obviously the public company expenses. But there's a lot of things that we spend in terms of outside services and so forth that we don't need to spend 2 of.

And so I think we'll get some very quick cost savings out of that activity. So if anything, I think we're very positive. I would tell you that the other thing we talked about when we announced the acquisition was that we thought our tax -- blended tax rate would be 19.5%. I think, today, now we believe that's more like 15%.

So that actually pushes up the near-term accretion number from about 10% to probably about 15%. So if anything, we're more optimistic about the near term and incredibly optimistic about the long term. .

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

Just looking at the model bottoms up and going back a bit to Ambrish's question. So if my model's correct, not only did you have record margins in the quarter, but auto and industrial also had record quarters.

And as I look at the outlook, the 13% midpoint year-on-year growth, relative to ADI's history and global GDP growth, I think we would typically look at the analog industry growing at a 2 to 2.5x multiple of global GDP growth. You're growing at 4x that.

So as we look at the business and where it is now and the early payoff in some of the platform investments the company has made, are we seeing the company start to move into a phase where its growth rate, relative to its own history and relative to the industry, is now at a nice premium to what we would have seen in the post-Lehman and even pre-Lehman periods?.

Yes, I think, firstly, you've got to take growth over a longer period of time. It's a longer integral. But yes, as I've said, what makes me very optimistic about things is that we're innovating like never before. And our -- we're solving big, meaningful problems of greater impact.

And our customer relationships are such that, I think, we're very, very well positioned to be able to partner with them to really uncover what they believe to be the most intractable challenges, both in terms of their innovation and their commercial impact. So, yes, I think we're innovating in a way that gives us tremendous opportunity for growth.

And as I said, we've got the customers with us. So I think I would expect -- we've said that our long-term growth model is 2 to 3x GDP. I think we're well positioned to at least deliver that organically. And as I said when Ambrish asked the question earlier, we will be updating our models over the coming couple of quarters once we integrate LTC here.

So we'll give you more color and visibility. .

Your next question comes from Stacy Rasgon with Bernstein Research. .

I guess, I also had a housekeeping question. Dave, you mentioned that you thought consumer would be down in the ballpark of 30% sequentially next quarter. But just mathematically, that doesn't give me the B2B down mid-single digits, so B2B-specific items will be down more than that.

So were you just sort of rounding on the consumer number? Or is there something else going on with the math?.

Yes. I was rounding on the consumer number. .

Okay.

So you expect it to be down more?.

A little bit more. .

Got it. That's the housekeeping question. If I could ask the real question now. Just last year, you gave us a little bit of color on content increases for Apple. And obviously, the businesses -- consumer was down a little bit this year, but not much with the content increase offsetting the inventory reduction.

What do you guys see for content increase on the next cycle for that product?.

I think it's too early to tell right now. I think we feel good about our content right now. Whether there'll be any additional items, it's, I think, difficult to say right now. .

Your next question comes from Blayne Curtis with Barclays. .

Actually, just a follow-up there on the consumer side. The 30-ish decline seems fairly normal. So just wondering if you can compare and contrast this year versus last year. And then you have additional components.

Are you seeing any yield issues or anything else like you saw in force touch this year? Or is it fairly smooth?.

Yes, we don't -- it's fairly smooth. I think what you saw kind of on a year-over-year basis as we came down a little bit while increasing content. So the driver of the opposite kind of force here was obviously, the inventory build that happened last year that doesn't appear to be happening this year.

So it's kind of tracking as you would normally expect. .

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

On the OpEx side of things, I realize you only have a couple of quarters left before Linear comes into the equation, but Dave, can you walk us through why you're guiding it up sequentially? If I look historically, I can't find a quarter in the last 4, 5 years where it was actually up.

And then how do you plan to manage the organic OpEx up until that Linear integration?.

Well, I'll take the second question first, which is, very carefully, I mean, we're not looking to build or add a lot of resources right now, because we're going to inherit a lot of resources from Linear Tech, and we want to optimize that combined workforce that we're going to have going forward.

So we're very, very, very cautiously managing OpEx, I would say, for the most part, keeping headcount flat. Maybe there's 1 or 2 people here or there that we need to add for one reason or the other. There is a dynamic within our compensation plan, variable compensation plan, that makes this phenomena happen every so often.

And that's a situation where, on a year-over-year basis, we have pretty meaningful growth, which is a component of our variable comp. And so while, as you point out, we do a pretty good job with the fixed expenses, bringing them down in the first quarter on a sequential basis, and generally, the same thing happens with a variable compensation.

In this particular quarter, that's not going to be the case because of the year-over-year component is going to actually drive a higher bonus payout. So that's really the dynamic there. Otherwise, it would have been kind of largely as you would have expected it to be managed in the first quarter. .

And I think, as you mentioned, Dave, in the prepared remarks, the operating margin in the first quarter is going to be, I think, in the midpoint around 32%, just pretty strong. I think we'd have to go back 5 or 6 years to see those kinds of operating margins in the first quarter. So okay, good question. .

Your next question comes from David Wong with Wells Fargo. .

Your B2B segments, industrial, automotive, comms, they've all swung from year-over-year declines a couple of quarters ago to solid 6% to 7% growth in October. Sounds like your January comm guidance assumes about the same.

Are you seeing any subsegments of these accelerating or actually strengthening from that, that very good October level?.

No, I think they're all pretty much behaving as you might expect. I mean, there are areas that we're obviously seeing just strength in general. Vince mentioned the health care space. Clearly, the aerospace and defense business has been good. Areas around IoT that we focused on have done well.

There are subsegments of the auto space like ADAS and powertrains so forth. Vince mentioned the A2B platform that we have in auto for the infotainment area. So all those things are doing probably on the marginal, a little bit better, but I would say it is a very, very broad-based situation with the B2B space.

And pretty much every subsegment is doing well. .

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

Just help me to get some quick color on LIDAR opportunity.

What do you see that opportunity for you guys as? And what does your acquisition bring to the table versus some of the competition out there?.

Yes, good question. So basically, the technology we've acquired is liquid crystal optical waveguide technology. And it's a solid-state approach to a very, very difficult problem, basically using a solid-state approach to optical beam steering. And that's critical if you're going to really push the resolution of LIDAR in the future.

So -- and in contrast to other beam-steering methods, for example, like MEMS mirrors, the spinners that you've seen running around Highway 101 there are optical phased arrays. The technology we've acquired doesn't have any sensitivity to vibration, for example.

So technically, we got great frame rates, no blind spots, and we can randomly steer the beam as well. So this technology, we believe, puts us firmly on the LIDAR road map.

And combined with our radar-based advanced driver assistance technology at 24 and 77-gig really gives us 2 of the very critical technology modalities to enable, not only greater safety, which everybody craves in transportation, but also puts us well on the path to enabling our customers to get closer to realizing autonomous driving as a major trend in the transportation sector.

So that's essentially what we see. And it's a potentially beyond $1 billion semiconductor TAM for this thing for us. So it could be potentially a wave, and that's why we bought the technology. It is reasonably early stage, but with the technology is working, now we've got to get it installed and make it work in the application. .

Your next question comes from William Stein with SunTrust. .

I'm hoping you can address the reasoning behind the greater optimism for revenue synergies, specifically is this more of an inside-out view when you sit down with engineers and think about the products that you might be able to deliver, or is it more customer-driven where you're hearing feedback that requests a combination of products, let's say. .

I would say it's a combination. Vince is going to add his color if he wants. But I would say it's a combination of, clearly, the business units, call it, the engineering portion of the business units, do see opportunities for products that they could make that would be special.

But I think a lot of it comes from just the sales force of the combined company looking at the other companies' portfolio and licking their chops at what they could do with that -- those products in their geographies, their customers and so forth. I think that's really where we see a lot of the kind of nearside opportunities. .

Yes, I think maybe as well in some -- particularly, of the larger customers, there's an open-door invitation to do more together, with the portfolios that we have on hand as well as getting our engineering teams together to figure out how to create even more value in the future together in terms of how we invest in R&D and apply it. .

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

Congrats on the great execution and the recovery in the B2B segments. My question, though, is related to the consumer segment.

And what is the right way to model that segment for the next 2 years? If you were in our shoes, would you model that segment to be flat, up or down? Just given the large influence of one of your customers in that segment, it's really hard to model that. So I was just wondering how you would be modeling it if you were in our shoes. .

Well, from a top line perspective, I'd say if we could get 10% growth compounded for the next few years in that business, we'd be very, very satisfied. .

But do you see -- do you have visibility for that, Vince?.

Well, look, you really have visibility into anything. I mean, the -- we work hard on building great products. We're working very, very hard on deepening our penetration, not just in one customer, but in several customers. So it's a rapid cycle business as well. And things can change. Markets can change. Application -- or products can hit, not hit.

Products get -- can even at the customer level, be brought to market or canceled. So as best we can tell, we're happy with the position we're in, in terms of the products and technology we have, the relationships we've got with the critical customers in this space. So I'm optimistic that we can grow this business at the level I've said.

And time will tell. We don't know. We can't predict because, also, it's a market with relatively fickle customers on the other side of things. So -- but I think we're well positioned to pick the upside, and that's pretty much what I've got to say about it. .

Yes. I mean, one thing I would add is that we do track kind of the opportunity set. And if you -- we certainly have the opportunities to do what Vince said. And it is a matter of markets and applications taking off and so forth. But from an opportunity perspective, we're optimistic about what we can do in the consumer space. .

Your next question comes from John Pitzer with Crédit Suisse. .

I guess, Vince, an earlier questioner rightly pointed out that within your B2B business, industrial and auto kind of established new all-time quarterly highs in the October quarter. I was hoping you could talk a little bit about the communications sector. You're still about $40 million below kind of peak revenue run rate a few years ago.

I know not all of Hittite gets wrapped up into comms, but especially given the success, at least on the design side from the Hittite acquisition, I'm just kind of curious as how you view the outlook for the comms business.

Why is that the business that's still kind of struggling relative to past highs? And what are kind of the growth drivers you see from here?.

Yes, well, again, I think you've got to take a very long-term view to the consumer space. We have been playing in this business from 1G into 4G. We're helping our customers with 4.5G. We're at the early stages of helping them architect 5G technologies as well. It's an important market for ADI.

And with Hittite, we're able to bring a level of completeness to our customer solutions. We're seeing the growth we expected out of Hittite that we had thought was there. We're getting the growth. We're well positioned with our customers. And we're grinding out results in 4G. I think we are getting share in 4G.

And on some of the older technologies, some of the 2.5, 3G technologies, clearly, there's price erosion, which offsets, to some extent, the growth that we get on 4G. But I think the customers are facing increasingly difficult challenges in this space. We're helping them solve them at an ever-increasing level of sophistication.

So it's a way for the future, and we'll grind out the results quarter-by-quarter, year-by-year. And I think, as I said, we are in an increasingly good position to gain share in this space, particularly, as we begin to push our products as well towards single-chip radio solutions in future.

So I think there are very few companies standing in the radial who can build a sustainable business for the long term, and ADI will be right at the top of that stack. .

Your next question comes from Chris Caso with CLSA. .

Wonder if you could talk about what you consider to be normal seasonality for the April quarter. And I ask because last year was the first quarter of the substantial revenue from the consumer segment, but that was undergoing the inventory adjustment.

If we normalize for the inventory adjustment, what would your expectations be for normal April?.

Yes, it's a good question, Chris. We're kind of in new territory. So I'll take a crack at it, but don't hold it -- hold me to it. I would expect, as is typical, the industrial and automotive sectors to have pretty good sequential growth.

I think the industrial sector usually has about 10%, and usually, the automotive sector is a little bit below 10%, but they're both pretty strong. Comms will do what it does. It's more cyclical than seasonal, I think, in most cases.

And then the consumer business, which is the big wildcard, I'm going to guess that it's down probably the same kind of level sequentially, as it was in the first quarter, probably in the 30%, plus or minus, or something like that in the second quarter again, and then, of course, we'll have a rebound after that in the third and fourth quarter as it seasonally does.

But hard to say, but that would be my guess. .

Your next question comes from Toshiya Hari with Goldman Sachs. .

I had a question on your incremental gross margins. I think, for the October quarter, on a year-over-year basis, most of your revenue growth dropped through to the gross margin line.

And also for the January quarter, if we take the midpoint of your revenue and gross margin guide, again, I think, close to 90% or 100% of your revenue growth is dropping through the bottom line.

So I guess, I'm curious, is this just product mix? Or are there other factors at play here?.

Yes, I mean, drop-through works when there isn't a lot of, like, changes going on around working capital and so forth. And I think that's kind of masking things a bit. Like, for example, in the fourth quarter, as I talked about, we had this inventory release, which drove up the gross margin.

So you have to kind of strip that away before you even look at it. And then in the first quarter, we are -- because we normally have this kind of utilization to climb in the first quarter, we're not going to have that because it's such -- the really good discipline we had through the year, this year, in terms of inventory management.

It's at a utilization level that's kind of atypical for us. So I'm not sure drop-through is the best way to look at it. It's more a function of -- at least in the first quarter, it's more a function of utilization levels.

And they're going to be in the kind of mid- to high 60s, and that's going to be really beneficial, relative to where we were last year at this time, which is kind of unusual for us. .

Your next question comes from C.J. Muse with Evercore. .

I was hoping to revisit the earlier comments regarding a 10% CAGR for consumer. If you look at your top customer in that bucket, I think 13% of your total revs in fiscal '16, that would imply your other consumer business declined about 25% year-on-year.

So curious, the 10% CAGR, is that a reflection of your vision to rising content at your very large customer there? Or is it a reflection of seeing greater breadth with other consumer customers as you look out over the next 1, 2, 3 years?.

Well, I think it's a combination of all of the above. I mean, it's a long-term prediction. We have -- as I said, we've certainly got the customer engagements. No, we have the -- we've got the technologies and products. And I think we're solving problems that really matter.

So what I'm indicating is that to my mind, it's probably more about how the market performs than individual, if you like, dynamics around engagements and individual customers. So it's really more about the market. So I think what we're talking about is the long-term expectation.

We're investing at a rate that should enable us to get those kind of growth rates. And I will say as well that we have funded our B2B businesses. I mean, we're spending more than 90% of the company's R&D on our B2B businesses to make sure that we drive growth and capture the opportunity that's available to us in those sectors.

So we're all the time making trade-offs in investment between the various applications in the B2B area, and we're very carefully picking up the vital few opportunities in consumer, where we think our technology makes an enormous difference to the user experience. .

C.J., just a clarification. The outside of the portables business within consumer -- so outside of portables, consumer was up sequentially and was about stable to the prior year. .

Your next question comes from Romit Shah with Instinet. .

Just regarding the merger, it sounds like early indications are good. But one of the things that's come up is just employee retention. Something to that extent was mentioned in the proxy. And one of the -- for some of us who have followed Linear over the years know that it's kind of a different culture, less COGS [ph] company.

So I'm just curious, how are you guys incentivizing the Linear people to stay at the organization? And Dave, as we put our merger models together, should we assume that OpEx and stock comp sort of step up on a like-for-like basis after the deal closes?.

Well, we do have -- we have a retention plan in place for them. So near term, we're not too worried about it.

But I mean, I would tell you that my own view on this, Vince, probably can opine, is that engineers stay with the company or come to a company based on what they're doing and whether they're doing exciting things and -- or branded the opportunity to work on really difficult problems and do amazing things.

And that's the environment we intend to create for both the ADI and Linear Tech engineers. So I'm not particularly worried about it. No, we're -- our compensation plan in the near term for ADI and Linear Tech people is to maintain what both of them have.

Over time, they'll be homogenized, but I think, in a way that -- a manner in which we wouldn't see a negative impact of. .

Yes. Just add a little more color to what Dave has said, Romit. I've spent a lot of time, as many of our leaders have, with the LTC engineering community, the business community, operations community. And we share a very similar view of the world. We understand each other's businesses very, very well.

We share a very similar value system, how we believe value gets created and captured. And I think there's tremendous excitement, by the way, all through both companies, incidentally, about how we can combine the complementary technology suites of both companies to do really marvelous things in the future.

And as Dave said earlier, that our sales forces are really chomping at the bit to get the 2 bags for the ADI people, to get the LT power bag and the LT salespeople to get the ADI mix signal bag and really capture the opportunity that we think is available to both of us over the next 3 or 4 years.

And I think, as Dave said, part of retention is a sense of equity and fair treatment in terms of compensation, and we pay a lot of attention to that.

But the soft side of the adventure that people can undertake here and work together to do amazing things into the future, solving really critical, meaningful problems of the world, that's what people want to do.

And I will tell you as well, we pay a lot of attention to retention, and I'm pleased to say that things are very, very stable on both sides of the fence. .

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

You mentioned pricing efficiencies helping gross margins year-over-year. I'm looking for color on that. So you have a pretty capable team in place now and for a while, and you've been -- I've been assuming you have been pricing by value of solutions. .

Yes, I mean, it's basically that. I mean, we're -- as Vince mentioned, I think, in one of the questions, we're increasingly putting more and more robust technology in the products, some cases, algorithms; some cases, other software; some cases, it's just hardware. But it's just a really -- solving a really challenging problem.

And what we do is work to try to get commensurate price for that value that we create. And not surprisingly, in a big organization, sometimes a little bit of that slips through the cracks. And what we've been doing over the last few years is plugging those holes. And so we're not looking to gauge our customers by any means.

We're looking to find the right optimal level of price per value, and that's what we do every day. I think we've done increasingly a better job at that over time. .

Your next question is from Harsh Kumar with Stephens. .

On that answer you gave. There seems to be some trend among semiconductor companies that they can actually get paid very well for what they're doing. Historically, it's always been downward pricing. But now, I think, some of the companies are trying to raise prices and maybe get paid fairly.

I'm curious, you mentioned -- you touched upon it in the previous answer, but I'm curious where your philosophy is as a company with that.

And how much of an impact did pricing have in margins for the last quarter?.

Right. So I think, Harsh, I would say that some companies who have been drifting into the 40s and maybe very low 50s in terms of gross margin, they got to get a whole new kind of philosophy in place for pricing. I mean, we do have -- we already had 60-plus percent gross margin. So we were actually pretty good at executing a strategy around this.

It was more just cleaning up a little bit around the edges, where we probably weren't executing as well. Hard to put a number on it for the quarter. I would say, though, that on the average, over the last, say, 4 years, our ASPs are probably up 30%, 40% probably. So it's obviously been a pretty big impact in terms of our gross margins. .

Your next question is from Cody Acree with Drexel Hamilton. .

Maybe just anymore color that you could give on the Wireline business. And you made some comments about strength you're seeing in 100-gig. .

Yes, so we've a reasonably significant business in the optical space in providing precision measurement and control for the various parts of the optical system. So it's grown well for the company over several years.

And I think as the need for data center infrastructure buildout continues, medium and long-haul, backhaul connectivity continues to be pressured. We see it as a good bet for the future and probably at the higher end of the spectrum of growth that we have put into our model. .

And our last question comes from Stephen Chin with UBS. .

I had a quick question on wireless infrastructures. I know that was down in the quarter.

Was that broad-based softness in that business? Or was the -- were there any pockets of positive demand? And also related, how would you characterize the current, I guess, the level of rollout to 4G and 4.5G? Are there any more greenfield upgrade opportunities left around the world in the next couple of years?.

Yes. So I guess, in the quarter, the macro base station and the backhaul were down for the quarter. Our small selectivity was up. And I think China is reasonably strong. And our transceiver pipeline, by the way, across the board -- not just in base station technology, but across the board, is continuing to build a nice pipeline of opportunity.

And also, we're converting the pipeline into decent revenue. I think we're still in the reasonably -- I mean, 4G is going to be around for a long, long time to come. It's -- the largest part of the world, by the way, is still on 2, 2.5 and 3G networks. So 4G will have a long life ahead of it.

And as I said, we'll be grinding out share gains there in an increasingly fitting atmosphere here, if you like, in terms of suppliers. 5G is on its way. As I said, we're in the earlier stages of helping our customers to architect platform solutions. But yes, I think it's going to be many, many years out yet.

So I think it will be -- I don't expect to see capital deployments from the carriers change an awful lot. So I think it'll be a slow and steady increase in the build-out of 4G. And I think that will be the environment till we get to 5G and see another specific step function ramp here. .

All right. Thanks, Stephen. That looks like it's the end of the call. We had a good quarter. The deal here for Linear Tech continues to stay on track, progressing well here for a close. Inventory, as Dave has talked about, is in great shape, gives us good gross margin leverage going into 2017.

Our business is now showing some really good momentum, especially in the B2B markets. You guys saw the results of some pretty strong operational execution this quarter, with our free cash flow margins up pretty significantly. So we appreciate you guys calling in, and we'll look to talk to you soon. Thanks. .

Happy Thanksgiving. .

Thank you. .

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