Analog Devices' (ADI) CEO Vincent Roche on Q4 2014 Results - Earnings Call Transcript

Analog Devices, Inc. (NASDAQ:ADI) Q4 2014 Earnings Conference Call November 25, 2014 5:00 PM ET

Executives

Ali Husain - Director, Investor Relations
Vincent Roche - President and CEO
Dave Zinsner - Vice President, Finance and CFO
Maria Tagliaferro - Director, Corporate Communications

Analysts

Steve Smigie - Raymond James
Ross Seymore - Deutsche Bank
Tore Svanberg - Stifel, Nicolaus
Vivek Arya - Bank of America Merrill Lynch
Craig Ellis - B. Riley Caris
Ambrish Srivastava - BMO Capital Markets
John Pitzer - Credit Suisse
Ian Ing - MKM Partners LLC
Craig Hettenbach - Morgan Stanley
Steve Chin - UBS
Stacy Rasgon - Sanford Bernstein
Blayne Curtis - Barclays
William Stein - SunTrust
Doug Freedman - RBC Capital Markets
Tristan Gerra - Robert W. Baird

Operator

Good afternoon. My name is Jennifer, and I will be your conference facilitator. At this time, I would like to welcome everyone to the Analog Devices Fourth Quarter and Fiscal Year 2014 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. (Operator Instructions)

I would now like to turn the conference over to your host for today, Mr. Ali Husain, Director of Investor Relations. Please proceed.

Ali Husain

Great, thanks, Jennifer. And good afternoon, everyone and thanks for joining our fourth quarter and fiscal year ‘14 earnings conference call. We’ve posted a press release and relating financial schedules on our IR website at investor.analog.com.

Now, I’d encourage everyone 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 fourth quarter results. Then Dave Zinsner, our Chief Financial Officer, will review our financial performance for the fourth quarter and fiscal year ’14 which will be detailed further in our 10-K which we expect to file next week as we finalize the purchase accounting relating to the Hittite transaction. Dave will also discuss our outlook for the first quarter fiscal ’15.

And then Vincent Roche, our President and CEO will provide closing remarks. Now after these comments, we will open it up for questions. Since we will be discussing both our fourth quarter and our fiscal year results today, our prepared remarks will run for about 20 minutes which should still leave ample for Q&A.

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 IR website.

The information we are about to discuss including our objectives, and our first quarter outlook includes forward looking statements. These forward looking statements include risks and uncertainties including but not limited to those described in our most recent 10-Q. Our actual results could differ materially from the forward looking statements made on today’s call. Subsequent events and developments may cause our outlook to change and except as required by law, we do not 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 may be accurate only as of the date of today’s live broadcast.

So now let's start the call.

So as you know, we completed the acquisition of Hittite Microwave in late July. So our fourth quarter was the first full quarter of contribution from Hittite. And our combined performance was very strong with results that were well above the midpoint of guidance.

Revenue in the fourth quarter totaled $814 million, increasing 12% sequentially and 20% year-over-year. On an organic basis, revenue increased 2% sequentially and 8% year-over-year.

communications infrastructure applications outperformed our revenue plan while the industrial automotive and consumer end markets were about in line with our expectations for the quarter. Revenue from communications infrastructure customers represented 27% of total sales, and increased 31% sequentially in the fourth quarter with both our organic and acquisition-related revenue growing faster than expected.

On an organic basis, fourth quarter communications revenue grew 5% sequentially and 23% year-over-year. And for the fiscal year, communications infrastructure revenues totaled $681 million.

Industrial customers represented 45% of total revenue in the quarter, increasing 6% sequentially and 19% year-over-year. On an organic basis, industrial performed as expected, declining 4% sequentially, primarily in the core industrial applications areas of automation and instrumentation while energy healthcare and defense and security in the aggregate were approximately flat sequentially.

For the fiscal year, industrial application revenue totaled $1.3 billion. Our automotive business grew in line with expectations, increasing 3% sequentially and 2% year-over-year. And this market represented 17% of our total revenue in the fourth quarter.

In fiscal ‘14 our automotive business grew 9%, or about two times the rate of vehicle unit growth. Automotive is now a $500 plus million a year business having grown at a 20 plus percent CAGR over the last five years and consequently more than doubling revenues since fiscal 2009.

Consumer revenue increased 14% sequentially, declined 3% year-over-year and represented 11% of sales in the fourth quarter. Approximately half of our consumer business is within prosumer audio video applications where life cycles and profitability levels are akin to our industrial business. The balance of our consumer revenue or only about 6% of total sales is for more typical consumer applications such as smartphones, tablets, wearables and DSLR cameras where our technology provides a real strategic benefit to our customers.

In total, we ended the year with revenue up approximately 9% to $2.9 billion of which 89% was from the industrial automotive and communications infrastructure markets.

And so now I’d like to turn the call over to Dave for details of our financial performance in the quarter and for the full-year, as well as for our business outlook for the first quarter. With the exception of revenue, Dave’s comments on our fourth quarter ‘14 P&L line items will exclude special items which in the aggregate totaled $126 million when comparing a fourth-quarter performance to our historical performance special items are also excluded from the sequential and year-over-year results. And reconciliations of these non-GAAP measures to their comparable GAAP measures are included on Schedule E of today's earnings release. Dave, it’s all yours.

Dave Zinsner

Thanks, Ali. Good afternoon everyone and thank you for joining us today. The fourth quarter was an excellent quarter across multiple dimensions. Revenue growth and profitability were strong and the strength of our balance sheet enabled us to meaningfully increase stock buyback activity in response to stock price volatility, which reduced our share count by approximately 2 million shares.

Sales in the fourth quarter increased to a record $814 million, well above the midpoint of guidance, and diluted earnings-per-share, excluding special items, grew to $0.69, near the high end of the range.

Gross margin at 66.4% of sales was better than our guidance on a better mix of business. Compared to the year ago period, gross margins increased 80 basis points on higher utilization and a better mix. Excluding acquisition-related inventory, days of inventory in the fourth quarter decreased by two days to 215 days and on a dollar basis, inventory increase $3 million compared to the prior quarter.

We expect to bring utilization rates in our fabs down by approximately 10 percentage points to the low 60s in the first quarter which on an expected lower sales should keep dollars of inventory approximately flat to fourth quarter levels.

Weeks of inventory in distribution were approximately 7.5 weeks consistent with the prior quarter. Total end customer orders decreased in the fourth quarter as compared to the third, in line with seasonal patterns and our book-to-bill was below 1 which is quite typical in advance of a seasonally slower first quarter.

Lead times during the quarter were stable with virtually all shipments occurring within our stated lead times of 4 to 6 weeks. We continued to align our investments to critical strategic priorities and during the quarter we streamlined our management structure and took other actions to redirect investments while maintaining operating expense control. As a result, during the quarter we recorded a $35 million restructuring charge.

Operating expenses in the fourth quarter increased 10% sequentially primarily from the inclusion of a full quarter’s activity with Hittite. On an organic basis, expenses were approximately flat to the prior quarter. As a percent of sales, operating expenses in the fourth quarter declined 90 basis points sequentially and declined 70 basis points year-over-year.

Operating profit before tax increased to $271 million or 33.2% of sales which is 70 basis points higher compared to the prior quarter and 140 basis points higher than the same quarter in the prior year. Other expense, which is primarily our net interest expense, was $6.4 million in the fourth quarter. We’re expecting net interest expense to be approximately $5 million per quarter in fiscal 2015.

Our tax rate in the fourth quarter was higher than planned as we adjusted our annual tax rate from 14.2% to 14.5% on higher than planned US income. Excluding special items, diluted earnings-per-share in the fourth quarter was $0.69, near the high-end of guidance and up 11% over the prior year.

Cash flow in the fourth quarter continued to be very strong. We generated $262 million or 32% of sales in operating cash flow and CapEx was $43 million resulting in free cash flow of $219 million or 27% of revenue.

Our fiscal 2015 plan is for capital spending to be between $150 million and $165 million, of which approximately $20 million relates to new facilities and upgrades to existing facilities, with the rest relating to our ongoing capital equipment spend.

The return of cash to our shareholders has been the top financial priority. During the quarter we returned $304 million to shareholders in the form of dividends and share repurchases which included stepped up buyback activity of $187 million.

On November 25, our Board of Directors declared a cash dividend of $0.37 per outstanding share of common stock. This will be paid on December 16 to all shareholders of record at the close of business on December 5. At the current stock price, this dividend represents an annual yield of approximately 2.9%.

During the fourth quarter, our cash and short-term investment balance decreased by $2 billion to $2.9 billion as we repaid the short-term debt associated with the Hittite transaction. At the end of the fourth quarter we had approximately $900 million in debt outstanding, resulting in a net cash position of $2 billion, with approximately $900 million available domestically.

As this is our first full quarter of contribution from Hittite, I'd like to give our investors some additional context around this great business. During the quarter, Hittite revenue increased to a record $81 million, which was up 15% year-over-year and delivered strong EPS accretion of 8% excluding special items.

The transaction closed a little over three months ago and the integration efforts are going extremely well. We have already opened up the Hittite products to our OEM customers and all customers are now covered across direct and indirect channels. Our distribution channel has begun stocking the Hittite parts and within a few weeks customers can place orders for Hittite products with ADI’s global distributor network and all order processing systems will be integrated.

Now let me take a moment to talk about our performance in fiscal 2014. Revenues of $2.9 billion increased 9% over the prior year. On an organic basis, ADI grew 6% year-over-year with our core business of industrial, communications infrastructure and automotive combining for 10% revenue growth both for the fiscal year and on a five-year CAGR basis.

Compared to the prior year non-GAAP gross margins of 66% and operating margins of 32% increased 170 basis points and 180 basis points respectively which was a good result in a period when factory utilization rates averaged only in the low 70s. While these are solid results, we are operating at the lower end of our financial leverage model range. As business conditions improve and our strategic investments continue to take hold, we expect that higher factory utilization rates coupled with careful expense management should drive better operating leverage.

For the year we generated operating cash flow of $872 million or 30% of sales and free cash flow of $694 million or 24% of sales. In addition, during the year we increased our dividend by 9% which represented the 11th dividend increase in the last 10 years.

During the year we repurchased $356 million of our stock. In total we returned $811 million or 117% of free cash flow to shareholders in the form of dividends and share repurchases.

So in summary, ADI’s fourth quarter and fiscal 2014 delivered solid results. We believe the portfolio and productivity actions we've taken set us up for better operating leverage as sales increase, factory utilization improves from current levels and we continue to tightly control operating expenses.

So now to our outlook for the first quarter, which with the exception of revenue expectations are on a non-GAAP basis and excludes special items that are outlined in today's call and release. After a strong fourth quarter we are planning for normal seasonality in all our end markets in the first quarter which includes the holiday period and typical calendar year-end inventory rebalancing at customers. As a result, we are planning for fiscal quarter revenues to be in the range of $745 million to $775 million. At the midpoint of this range, revenue would increase 21% year-over-year.

Based on lower expected sequential revenue, we plan to reduce production levels in the first quarter to the low 60s from their current low 70s levels. As a result we expect gross margins in the first quarter to be approximately 65%. We expect operating expenses in the first quarter to decline sequentially to approximately $263 million or down approximately $7 million.

We’re planning for our tax rate to be approximately 14.5% in the first quarter which is our planned non-GAAP tax rate for all of fiscal 2015. In total we expect diluted earnings-per-share to be between $0.58 and $0.64 excluding special items. We intend to keep our expenses under tight control in fiscal 2015 holding OpEx flat to fourth quarter run rates.

For the year we plan to invest the savings of approximately $40 million relating to this quarter's restructuring charge by redirecting investments to strategic growth areas and to a lesser extent regular inflationary items. By fiscal quarter, we expect operating expenses in the first quarter decline and to increase in subsequent quarters but nevertheless excluding special items, we expect operating expense to decline as a percent of sales in 2015 and for our financial model to deliver better operating leverage.

So now I will turn the call over to Vince to wrap it up.

Vincent Roche

Thank you, Dave and good afternoon to you all. As you can tell from our remarks this afternoon, we had a great fourth quarter and I am very pleased with our execution in what was a strong finish to fiscal ’14.

As we approach our 50th anniversary, I want to spend some time talking to you about where we stand today and where we want to take our company. At ADI, we’ve been dedicated to delivering the highest performance signal processing products and solutions over the past 50 years to our tens of thousands of customers and across hundreds of applications. And we remain true to this mission.

Over the past few years, we've been refocusing our strategy and our organization and directing investments to those areas that we believe will drive sustainable and profitable growth for ADI. As a result, we're in a stronger position today in terms of our technologies, our markets and our customers than we have been at any point in our history.

This transformation, while difficult has been necessary and now provides us with a strong foundation upon which to continue to build the future of our company. As we have spoken to you many times before about many forces are driving the IT industry such as in the areas of automation and connectivity.

From time to time I'd like to provide investors with a deeper perspective on key aspects of some of these trends and ADI’s strategy relative to them. Now today I'd like to talk more specifically about connectivity which is becoming as important as electricity in the modern global economy.

From connected devices to connected cars to connected machines, ubiquitous and secure connectivity is a critical challenge that we believe will help drive growth across our key markets. But what I want to focus on today is specific to our communications infrastructure business. By the end of the decade, networks will need to support 1000 times more data capacity likely on higher frequency bands to support next-generation communication standards.

Today, only about 4% of mobile subscriptions are 4G, yet they are responsible for one-third of all mobile data traffic. In addition, the number of 4G subscribers is forecasted to increase more than seven-fold to about 30% by the end of the decade.

Now the expected increase in average spectrum efficiency and the available spectrum is unlikely to keep pace with consumer demand leaving a significant gap requiring additional carrier investments in new base stations and transmission equipment. The increases in the number of 4G subscribers, the bandwidth used per subscriber and the number of base station units deployed is expected to effectively double our served available market in the area of communications infrastructure alone to about $4 billion by the end of 2020.

Carriers are dealing with enormous challenges in keeping up with data demand. They need flexibility, efficiency and coverage while delivering ever-increasing bandwidth levels. The network must always be on, must be reliably available everywhere and must support new mission-critical applications, all under the envelope of decreasing total cost of ownership.

In order to respond to these challenges, our customers are turning to new radio and smarter antenna architectures which maximize spectrum efficiency and significantly increase the radio channel count. At ADI, we anticipated these challenges and have invested aggressively to develop the highest performance signal processing products, processes and solutions over the past several years. In radio applications like all signal processing applications, the data converter defines the system performance and ADI is the undisputed converter leader.

Over the last several years, we've increased our lead in converters and we've also augmented our technology offerings by developing and acquiring RF and microwave technology, high-speed clocking technology and critical algorithmic technology. RF and microwave expertise and the acquisition of Hittite are critical to our strategy to deliver the most advanced radio solutions.

ADI now has the ability to convert the entire frequency spectrum all the way from digital to beyond 100 GHz which meaningfully differentiates us relative to our competitors. We have engaged with many of our largest customers and they too are very excited about our acquisition of Hittite, as we forge ahead together, re-architecting customer technology roadmaps in previously unimaginable ways. In fact, in the short period of time since we closed the transaction we are very very pleased with the early design activity ramp rate.

As expected, we have raised the level of collaboration in our customers’ design activities. For example, in key applications in communications infrastructure, aerospace and industrial instrumentation not only are we benefiting in the short term by the combination of the ADI and Hittite product portfolios, but our visibility into longer-term system design needs is dramatically increasing and opening up additional opportunity for ADI.

So overall we’re extremely pleased with the speed, the quality and results of our integration efforts which have been facilitated by the strong cultural affinity we share across our organizations, from engineering to customer support and of course to management.

As you may have heard, Rick Hess, the former CEO of Hittite has joined my staff reporting to me with responsibility for not only RF and microwave but also communications infrastructure and automotive, the two markets we believe will be most transformed by ADI’s connectivity solutions capability.

So to summarize the overall theme of my prepared remarks, in our view the combination of greatly expanding demand for connectivity and limited available spectrum will drive growth for ADI in the infrastructure market. That said, this is just one of the exciting growth drivers that our diversified business is capitalizing on and these are all key ingredients that position us for sustainable earnings growth well into the future.

So with that, I will turn it over to you for any questions that you might have.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Steve Smigie with Raymond James.

Steve Smigie

So I was hoping you guys could talk about what you see happening with the gross margin as we move forward into April – obviously you’re taking down utilization here. So you can talk a little bit about why you’re doing that and how that looks into April?

Dave Zinsner

Now that’s fairly typical that we kind of reduced production levels in the first quarter consistent with what most of our customers do by the way. So we usually take a margin hit in the first quarter, that as you know the second quarter tends to be a very good quarter for us, seasonally a very strong quarter with a lot of production days. And so in the second quarter we start to ramp back up production. And so my guess is we will very quickly step back to gross margins generally in the range that we exited fourth quarter at. And as you know we constantly are trying to make improvements on the gross margin front through the years. And so our goal is to continually drive those gross margins up over time so we get to the high-end of our 65% to 68% gross margin model.

Steve Smigie

And then just on the revenue side, I guess you talked a lot about the comp opportunity. Can you talk a little bit about how that growth looks near-term, is that going to be your biggest driver over the next couple quarter? And there are some questions about CapEx spend over the next few quarters. Can you talk about how your dollar content gain may differentiate your growth versus that of the telecom equipment market?

Dave Zinsner

So I mean generally as we have looked at the communications business, obviously we’re expecting it to come off a little bit this quarter which is fairly typical for the communications infrastructure space given many of our customers like to rebalance their inventories. But the end demand actually looks very good, and certain areas have pockets – periodic pockets of weakness but the beauty of our products as they go into equipment that ends up in just about every region of the world and so where some areas might be seeing weakness others are seeing strength. And so we generally think that communications is going to do quite well over the course of the year. And most of that is – as I think one of you – either Ali or Vince said in the prepared remarks, there is an overwhelming need for more bandwidth and we don't think that's going to abate anytime soon. So our expectation is that the business will do quite well.

Our dollar content in 4G is at least 20% to 30% better than 3G and I think a lot of the carriers have indicated that they're going to migrate to small cell technology in a big way over the course of the next couple years, because that just will drive the radio count up over time. That’s going to be very good for us because our dollar content for radio is quite good and if the number of radio increases on a unit basis, that should drive good tailwinds for us in that business.

Operator

Our next question comes from Ross Seymore with Deutsche Bank.

Ross Seymore

Question on the orders, and how the quarter unfolded. I know you said in your press release that the orders were stable in the quarter but there seemed to be some significant volatility amongst many of your peers .Can you just talk about how the quarter trended for you if you saw that volatility and what the cause was?

Dave Zinsner

Obviously the first month of the quarter was a little bit weaker, August. It came back a little bit in September and October finished off strong. I’d say it was relatively stable though, per week it might've been a couple million dollars difference really on a per week basis. So we did not see any perturbation through the quarter. Other suppliers into the space are sometimes targeting different markets and those markets may have behaved differently than the markets that we’re focused in. But I think in general things were very stable through the entire quarter and really continued to be stable in the month of November.

Ross Seymore

I guess as my follow-up, just you mentioned in an answer to the prior question that you expected comps to be down, any sort of color on the down roughly 7% sequentially than your guidance, how that'll split between the foreign markets that you serve and then maybe in 2015 which would be the fastest or slowest growing of those, then I will go away.

Dave Zinsner

My gut would say that communications probably will be down a little bit more than the other three end markets, which is definitely seasonal versus what happened in history. Industrial and automotive will also be down. My guess is that the consumer business although down will probably do a little bit better than the other three markets, simply because we have some decent product cycles that appear to be hitting in the first quarter to some extent. And so it might be a little bit insulated from what is typically seasonally down for the first quarter.

For the year we’re pretty optimistic about every end market I have to say. I think that four end markets are going to do quite well in the 2015 timeframe. We think in each case there's some good macro tailwinds going on and we've made a lot of investments particularly in what we call the B2B space which is the communications industrial and automotive markets over the last four, five years. And my guess is that, that will start to really generate revenue on a go forward basis.

Operator

And our next question is from Tore Svanberg with Stifel.

Tore Svanberg

Vince, you talked about your connectivity business and thanks for that. I was also hoping if you could update us on your MEMS business and if there is any new initiatives there that we should be aware of?

Vincent Roche

You know, MEMS of course is very much for ADI centered in the automotive space. It’s where we got our traction in that technology. We continue to invest heavily to make sure that we are over the long term a major major player in the MEMS business. It's instrumental in our safety strategy of course in general within the automotive sector. We have as well been developing some very very low-power technologies that are being used in new applications in the industrial space, for example, and also in the healthcare area. So it's a growing strategy for the company, it’s an important strategy for the company, it’s part of our sensor initiative which we talked in some depths at the analyst day. So it is still very very automotive centric but diversifying into particularly industrial and healthcare applications.

Operator

Our next question comes from Vivek Arya with Bank of America.

Vivek Arya

I will ask a two-parter. So first, just a very broad question for Vince. How you’re thinking maybe broadly about 2015 because there seems to be a recovery but it varies quite a bit by region, US versus other regions. I am wondering what you’re getting from your customers. And then my more detail question for Dave is that when I look at your Jan quarter guidance on gross margins, you’re guiding sales down 7% but gross margins down 140 basis points. And when I look at the same period last year your sales declined by a similar amount but gross margins only came down by 50 bps and this year you have the benefit of the better mix from Hittite. So I am just curious why you are guiding gross margins down a bit more than they were last year despite having the benefit of mix from Hittite?

Vincent Roche

Okay. I will go first. So on your first question about FY’15, as Dave has said we’re feeling pretty good about ‘15 overall. I think for ADI it's really a question of how the macro-economy behaves. Our customers generally speaking, I think – and I speak with a lot of our customers each quarter. I would say in all segments, industrial, communications infrastructure, automotive, our customers are feeling pretty good about the world and as I said, as long as the macroeconomy holds in play, I think we will have a very very decent ‘15 in across all the market sectors. And as Dave said we have – we’ve got a couple of product cycles in the consumer space that should add additional revenue. And I think as well, we've gotten be the worst of the headwinds on the consumer business behind us. So I think as long as the market we will do fine.

Ali Husain

Vivek, i think we’re getting something on the line there. Do you have your line on mute?

Vivek Arya

I have unmuted just to make sure there is no –

Dave Zinsner

Okay. So really when you look at it, rather than look at it kind of on a sequential basis, I look at it kind of on a year-over-year basis. So gross margins in the first quarter 2014 were about 65% and that is around the guidance that we’re giving this quarter .And we are getting the benefit of Hittite. Now Hittite is only one-tenth of the size of ADI. So the margin accretion from that is a little bit but not significant at this point, although I would point out that we do expect the gross margins to improve for the Hittite business as we start to capture the synergies on the cost of manufacturing towards the end of 2015 and then into 2016.

So really what -- utilization is going to be at fairly similar level in this quarter versus last year at this time. So net, net, those two are neutral. The difference really comes from the mix. The mix is going to be a little bit more negative this time around versus last year, and most of that quite honestly is the consumer business. The consumer business I think as a percent of revenue is going to end up being a little bit higher this quarter versus last year. And that’s going to drive it. So in any event that actually basically is the answer of that question.

Operator

Our next question is from Craig Ellis with B. Riley Caris.

Craig Ellis

Dave, you and Vince indicated that you're happy with the way the Hittite integration is going. And it sounds like a lot of the work has been done to get the channels to a point where you can start driving sales. You’ve talked about the potential for revenue synergies in the past. Can you quantify what you might be able to realize as you look out over the coming fiscal year from a revenue synergy standpoint as you put the Hittite product into your channel and vice versa?

Dave Zinsner

Well I can't point at this point give you a specific figure on what we have in terms of synergies. It’s a little bit early to tell at this point but I would say that the early traction we have gotten at a customer level has been very significant. Of course it takes a couple years before that translates into revenue for us, because those are the markets we operate in. But there have been several cases where we actually were not going to win the next generation of a product or we were going to get a very piecemeal portion of the product where the entire dialogue between us and the customer changed radically when we had the Hittite products to offer. So we were really starting to go from just talking about some sub-segment of the circuit design to a whole solution that we could provide given our ability to do the microwave portion of the spectrum.

Vincent Roche

So I think Craig, in terms of timing just to add more color to what Dave has said. Given the design cycles, I think when we announced the acquisition of Hittite, we had said that we thought we should start to see some uptick in revenue, additional revenue beyond the Hittite specific pipeline with the combination of the two pieces in the FY ‘16 kind of area. So that's my sense. We will begin to see the revenue growth benefits through the OEM distribution channels somewhere in the - I think the early part of 2016, late 2015, early part of 2016.

Operator

And our next question is from Ambrish Srivastava with BMO Capital Markets.

Ambrish Srivastava

Just one for me. What specific areas are you targeting for the joint products between Hittite which helped the core outlook?

Vincent Roche

The great strength of the franchise we’ve gotten now, that we combine the ADI’s strengths in mixed-signal and the very very high-performance analog signal processing products that Hittite has got, and one of the great attractions to us of course is that it directly lines up with the markets that we really care about. So areas like industrial infrastructure, for example, you know in the instrumentation area specifically, areas like aerospace, Hittite has a strong position in the military area, and I think we'll see additional growth there. Of course communications infrastructure, the backhaul and the emerging 5G networks that require much much higher frequency coverage will benefit from the capabilities that we can bring jointly.

As you know there are in the area of automotive applications for radar technology, and the frequency levels there get ever higher. So it's very diverse and the good news is that from our customer standpoint we can cover the applications from end to end and that's exactly what we are setting out to do and we’ve made as Dave said very good progress in engaging with our OEM customers and are now really beginning in earnest the movement of our products through the distribution channels, could give us the long-tail effects so to speak.

Operator

Our next question is from John Pitzer with Credit Suisse.

John Pitzer

I guess I will ask my question on the auto business. Vince, it’s been a great business for you guys. As you mentioned in your prepared comments, I think a 20 plus percent CAGR over the last 5 years. That growth rate though has been decelerating a bit this year. I think it was up 9% for the full fiscal year but just 2% year-over-year in the fiscal fourth quarter. I am just kind of curious how much of that do you think is just some of the macro uncertainties out there hitting SARS versus timing of kind of content growth? And when you look out to fiscal year ’15, how do you think about content versus unit growth for you guys and what could be sort of the applications we should be thinking about for content growth going forward?

Vincent Roche

Yeah, it’s a great question. I think from our perspective we've obviously been way out growing the unit volumes of cars being sold over the past five years. My sense is on a steady state basis over the longer-term if we could grow our revenues at 2x kind of the unit volume of cars that would be a good result. And I will give you a little more color. I think – yeah, we have seen a little deceleration of the business of late, our infotainment business is very strong and growing. We’ve announced some very exciting new products there as well just recently in that area. I think the area where our growth has been little slower of late is safety and specifically in the active and passive safety area where some of the older products have just lingered a little bit longer. But again we have a great pipeline of products that go across the entire safety spectrum, active, passive as well as predictive.

So my sense is we will be through 15 in better shape in terms of growth assuming again that the macroeconomy holds up. But as I said I think if we could grow this business at 2x the rate of car growth that will be a very good result over the long-term.

Operator

Our next question is from Ian Ing with MKM Partners LLC.

Ian Ing

Yeah, thanks. I’ve got a CapEx question here. So what are the milestones to eventually in-source the Hittite Microwave revenues? It looks like it’s really elevating your CapEx spend right now, and then also, TI talks about being opportunistic to eventually to get low-cost manufacturing assets to meet incremental long-term demand; is that something you’re looking at too?

Dave Zinsner

On the Hittite production, we at this point now plan to continue to do the front end wafers through outside boundaries. They actually were doing their own tests. The real cost savings is we’re going to move that high-volume test activity to our captive facility in the Philippines. So it's really not really moving inside, I guess it’s moving from one location to another internally that drives the benefits in terms of gross margin. What was the second question, Ian? I missed that.

Ian Ing

Well manufacturing assets on a higher sale, TI talks about being opportunistic in certain situation, is that something you’re looking at too or are you happy with –

Dave Zinsner

We have -- we exited the fourth quarter operating at 70% -- mid low 70s utilization, we’re going to come back down to the low 60s in the first quarter. My expectation is we get back up into the low to mid 70s in the second quarter. So we have quite a bit of headroom before we have to worry about adding capacity and quite honestly we actually have a lot of the clean room space already. So it’s maybe a few pieces of equipment here, there that would actually expand that capacity quite significantly. So I mean we do buy equipment in the aftermarket in general for the front end. But I don't think that we’re going to have any meaningful change in our CapEx approach over the foreseeable future, given that we have so much headroom in terms of our capacity.

Operator

Our next question is from Craig Hettenbach with Morgan Stanley.

Craig Hettenbach

Vince, in prior calls you’ve given some context on the industrial market in terms of customers and their view, there’s a fair amount of variability by region today with Europe weakening a bit but US still very strong. I’d love to get your take on what industrial customers are thinking going into next year and any particular sub-segments that standout to you from a growth perspective?

Vincent Roche

Yeah, regionally it’s been fairly even, we’ve been -- I think I mentioned before on a couple of calls that we’ve been particularly pleased with the growth rate of our business in Asia in the industrial area and yeah, I think overall we've seen again good growth in Asia over the recent times, Japan included. With just less production days in Europe during the fourth quarter we saw a little bit of a downturn there .But overall I think the strength is quite evenly distributed and from a segment standpoint, energy has been strong particularly the transmission and distribution part of that. Automation has been strong and the instrumentation side of things took a little bit of a breather in the fourth quarter as expected particularly on the ATE side. But as I mentioned a little bit earlier our industrial customers in general are feeling good about the world, generally speaking looking into ‘15 and if the macroeconomy holds up I believe that the CapEx will be spent and we will benefit from that.

Ali Husain

Craig, I would just add that inventory in the channel was about 7.5 weeks this quarter. It’s pretty consistent with prior quarter and deferred gross income was about flat as well the prior quarter. So I think from an inventory standpoint, I think things seem to be in pretty good shape there as well. So appreciate the question and we will move on to the next question, operator.

Operator

Our next question is from Steve Chin with UBS.

Steve Chin

A couple of follow-up questions on the automotive segment if I could. Just looking at the guidance for Q1, that are down seasonal quarter and that’s consistent with the last two years where it was down sequentially in last Q1. But the two year prior to that, the automotive business was up. I was wondering if it’s a function of just the existing part of technology wins that you have currently, where the business there is fairly normalizing and I am imagining a fairly concentrated in the more developed markets or developed market automotive manufacturers. But is there any potential for some of these new technologies like the active safety features and asking more infotainment design wins that may go into mas market vehicles, is there potential to change the seasonality in the business where we see like I guess three up quarters and the typical one down quarter –

Vincent Roche

I am not sure we will change seasonality but to give you an example, our advanced driver systems business – the predictive safety business has been up actually about almost 20% year-over-year. So that part of the business is growing well, it’s still a small part of the safety strategy for ADI but it’s growing fast and as it penetrates, as that modality penetrates more and more car offerings in future we will benefit greatly from that. So I think the powertrain business which is around oil quality sensing, fuel sensing, around battery management that's going well. We have a tremendous penetration particularly on the battery side of things. But we've also got some new product waves coming aside from the advanced driver systems area. We have a new bus structure for processing audio and sound in a car which is gaining a lot of traction particularly in the mid and high-end of the car market.

So I think as I said overall it's still going to be a -- i think a very good growth space for IC industry. The many, many cars now have got many thousands of semiconductors perf [ph], there is more and more sensing going to take place across many many facets of the car. So I think for the long-term it's going to be a great business. As I said a little bit earlier as well, we’ve seen just some of our safety programs, some of the product cycles that are lasting but longer than we expected. But the design activity is very very strong and our business as well -- we put a lot of focus on trying to make sure our automotive business really reaches into the Asia region as well, so I think during ‘15 we will see some good uptick there with a couple of new customers that are quite significant. So I think overall it will be a great story for many many years to come.

Operator

Our next question is from Stacy Rasgon with Sanford Bernstein.

Stacy Rasgon

If you don’t mind, I would like to spend it on restructuring and OpEx. So can you talk about the restructuring you did, what did you -- where you’re repurposing, is this Hittite related or does it go beyond that? And given the guidance with sort of flattish OpEx through 2015, how you’re thinking about your variable compensation in that context? So are you already sort of incorporating it into that guidance or will there be variability depending on the business level?

Dave Zinsner

Okay. So this did not really include much in the way of Hittite restructuring. We think we took that charge in advance of this but most of it was as you might imagine we are heavily focused in the B2B space. And so we have kind of refined the resources necessary to operate successfully in consumer in the areas we want to operate in consumer, that was a meaningful part of the adjustments. And then there were some various product areas and quite honestly we also took a little bit of a more holistic view of the management structure and attempted to more streamline that to enable better decision-making and more align it with the strategic direction of ADI on a go forward basis. And so some of the areas impacted were in the management ranks quite honestly. I'm sorry, Stacy, what was the other part of your question?

Stacy Rasgon

I am sorry. How are you I guess conceptually variable compensation next year?

Dave Zinsner

So on the variable comp side, that guidance of being flat to fourth quarter run rate contemplated that we would hopefully see variable compensation increasing next year. And so we contemplated that in our guidance for this kind of flattish – flattish related to the fourth quarter in terms of operating expenses. So that really won't be a headwind on the OpEx side.

Vincent Roche

Just a little more color Stacy and what Dave said, so we have reorganized the company and we have set up two large business units with tighter alignment between strategy and execution I would say. And as Dave said what we’re trying to do is just get more speed in general to make – we’re trying to make ADI faster everywhere and also get our engineers even closer to our customers. So I think with the restructuring there's been some natural efficiency gain and that's had a large impact on the restructuring of the company.

Operator

Our next question comes from Blayne Curtis with Barclays.

Blayne Curtis

I was just wondering if you could provide a little bit more color on the softness or seasonality you are seeing in comp, that we’ve seen maybe either by product or geography would be helpful. I think we have seen some weakness in wired, I think wireless has been let's negative in the Q4 from others, just curious your thoughts there.

Dave Zinsner

I mean this is really a standard seasonal, this is I wouldn't call it weakness, I’d call it just kind of the standard seasonality we see given the fact that we have kind of their year ends -- our OEM customers, their year-end is impacting our business as they kind of calibrate inventory levels. But in general we’ve seen that business being very very stable and disciplined.

Vincent Roche

As you know our business has really two components, it’s got the wireless infrastructure part which is the dominant part of the revenue stream in infrastructure but also the wired portion has behaved very very well over the last couple of quarters. So we've seen evenness in terms of performance in both areas but as Dave said, what we’re seeing now is just a seasonal breather.

Operator

And our next question comes from William Stein with SunTrust

William Stein

I am hoping to just get a clarification on the operating leverage comments. I thought I heard well you certainly guided OpEx for the coming quarter and I thought I heard a comment about 40 million of savings in that category. And I also heard about better leverage through the year. Can you maybe quantify it a little bit as we go through the year, what kind of leverage we can expect to see come in on the OpEx line?

Dave Zinsner

It’s tough for me to predict what the top line is going to do which is what -- the major part of the numbers, to calculate the operating leverage. But what I can tell you is that we think OpEx will be down about $7 million in the first quarter. We will get about $40 million of savings from the restructuring. Obviously there are things that are going to be headwinds next year, one of which is as I already pointed out the variable compensation is expected to increase next year versus this year. Also we will have kind of the normal salary increases and so forth that come into the P&L through the year. But I think the expectation is that on average over the four quarters it should average about $270 million per quarter which is basically what we had in OpEx in the fourth quarter. The first quarter obviously may be 263 – whatever the number is, somewhere in that range.

So the second, third, fourth, -- I am adding a quarter – second, third and fourth quarter will probably be a step function higher than that 270 to get the average to be somewhere in the range. I think it's going to be relatively flattish through the rest of the year though. It might incrementally add $1 million or $2 million per quarter, something in that range but I think in general it's not going to be terribly different from quarter to quarter through the year.

Operator

Our next question comes from Doug Freedman with RBC.

Doug Freedman

Hi guys, thanks for taking my question. If I could move our focus over to pricing and what you're seeing in the marketplace. I know you’ve had some programs in the past that focused on your ASPs. Can you comment on what you're seeing in terms of year-on-year ASP changes in your portfolio or whether you've seen any like-for-like ASP changes in the products that you sell via annual contract?

Dave Zinsner

It’s very relatively stable. I mean we are obviously in a competitive market and certain OEMs are top on us, as they are with all their suppliers. And so we see some erosion in some of the major customers that we see from year to year. But I think in general the margins are the – rather the ASPs have been relatively stable. We have obviously taken steps to manage the business so that we are extracting the right value on the ASP side for the value we’re providing to the customers, not surprisingly. And so in certain instances that’s enabled us to adjust prices in the opposite direction which has kind of helped I think stabilizing ASPs. And quite honestly that’s been a real focus of mine quite honestly to – as I think as the key lever to seeing our gross margins expand to be focusing on that particular metric.

Operator

And our final question comes from Tristan Gerra with RW Baird.

Tristan Gerra

You mentioned opportunities in small cell in the next two years and what’s the catalyst given the ramp of this product plan [ph] has been pushed out, and if you could talk about what the competitive landscape is going to look like in small cell relative to what you’re seeing in base station today and how you feel you’re positioned in this market?

Vincent Roche

So the first part of the question about what's driving – it’s really the densification of the network. As you know carriers have been spending the last few years trying to build out a basic footprint but with the massive demand increase for bandwidth, carriers are now desperately trying to catch up with consumer demand by laying in more capacity to deal with the bandwidth needs. So there is a tremendous amount of performance, all the same kind of performance needs exist in the small cell, as the macro cell in terms of spectrum efficiency, number of channels -- number of radios and frequencies that can be managed flexibly albeit – in a smaller kind of footprint. But so we focus heavily as a company, as I said, we've been trying to get ahead by anticipating the needs. So we've got a transceiver portfolio that is best in class that has got us into a huge number of sockets across the globe in Asia, in America, in Europe. So I think what it will do it will add a lot more available market and that will be I think a large growth portion of the story as we move towards $4 billion sum over the next six or seven years.

Dave Zinsner

And on the competitive landscape I think in general, it’s the same dynamics as in the larger bases. I mean this is really hard stuff to do very high-speed radio capability now integrated and so this won’t have I think an opportunity for new entrants at least from our standpoint, because this is just -- this is getting really really cutting-edge quite honestly.

Ali Husain

And Tristan, what I would only add to that is we’ve seen some of the headlines in the US about $34 odd billion of spectrum being auctioned, that sort of mid-level type spectrum is really centered in some of the more dense urban areas in the US. And so I think that's a very good sign that 2015 could be a good year for small cell as well. So I appreciation the question and I will have Vince to come back and provide us closing remarks before we sign off.

Vincent Roche

Thank you. Thanks Ali. So as we approach – we are in our FY ‘15 now -- i just want to let you know that we remain true to our core principles as a company. And basically that’s superior innovation, drive superior returns, we have important work ahead of us. We have a tremendous vein of opportunity available for us to convert into revenue and ultimately deliver very high quality earnings to you and returns in general.

So at ADI, we will continue to innovate to execute to a high level and deliver for our customers, our employees and also for our shareholders. So with that, I’d like to thank you all for joining us this afternoon and I wish you all a very very happy and safe Thanksgiving.

Operator

Thank you. This concludes today’s Analog Devices conference call. And you may now disconnect.