Morning, and welcome to the Analog Devices Second Quarter Fiscal Year 2018 Earnings Conference Call, which is being audio webcast via telephone and over the web. I'd like to now introduce your host for today's call, Mr. Michael Lucarelli, Director of Investor Relations. Sir, the floor is yours.
Thank you, Jennifer. Good morning, everybody. Thanks for joining our Q2 2018 conference call. With me on the call today are ADI's CEO, Vincent Roche and ADI's CFO, Prashanth Mahendra Raja. For anyone who missed the release, you can find it and relating financial schedules at investor.
Analog.com. This conference call is being webcast live and recording will be archived in the Investors section of our website. Now on to the disclosures. The information we're about to discuss, including our objectives and outlook, include 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 Q.
These forward looking statements reflect our opinion as of the date of this call. We undertake no obligation to update forward looking statements in light of new information or future events. Our commentary about ADI's 2nd quarter financial results will include non GAAP financial measures, which exclude special items. In comparing our 2nd quarter results to our historical performance, special items are also excluded from the prior quarter and year over year results. Available reconciliations of these non GAAP measures to the most directly comparable GAAP measures and additional information about our non GAAP measures are included in today's earnings release and on our web schedules, which we posted under the Quarterly Results section at investor.
Analog.com. Okay. So, with that, I'll turn it over to ADI's CEO, Vincent Roche.
Thanks, Mike, and good morning, everyone. Well, the Q2 of fiscal 2018 was remarkable for ADI. We posted non GAAP diluted earnings per share above the high end of our guidance and set a new high watermark in free cash flow generation and I'm pleased to share some perspective on our results with you now. So revenue in the Q2 came in just above the high end of our guidance as strength across our B2B markets, especially in the industrial and communication sectors offset the expected decline in consumer. Our results were also supported by our linear tech franchise which posted a record revenue quarter.
Gross and operating margin expanded substantially compared to the year ago quarter driving a more than 40% increase year over year in our non GAAP diluted earnings per share. This execution resulted in record free cash flow in the quarter and our combined company adjusted free cash flow margins over the trailing 12 months continue to place us in the highest tier of the S and P 500. Now before we go deeper into our financial performance, I'd like to take this opportunity to provide investors with a deeper perspective on some of our key technology and market trends and ADI's strategy relative to them. I've spoken before about the dawn of the 3rd wave of information and communications technology or ICT, which is characterized by ubiquitous sensing, hyperscale and edge computing, and pervasive connectivity. In this world, digital systems increasingly rely on real world information to make mission critical decisions and the accuracy and the integrity of this information is becoming more and more important.
Simultaneously, the actual challenge of identifying and extracting signals in the presence of increasing levels of noise is becoming harder. Now, I believe that this is creating an inflection in the analog industry and it's enabling ADI to play a critical role in generating and communicating high quality information to leverage our cutting edge innovation and solutions to tackle our customers' hardest problems from sensor to cloud, microwave to bits, and nanowatts to kilowatts. It's our ability to sense, measure, interpret, power, and connect these two worlds that is helping to enable autonomous machines, natural human to machine interaction, and future important technologies such as virtual and augmented reality and so on. Today though, I'd like to talk more specifically about connectivity and 5 gs which has been the subject of much news coverage lately and which represents the next big investment phase in wireless infrastructure and how we view its evolution and timing. In fact, an entirely new wireless and wireline network architecture will ultimately be needed to meet the demands for orders of magnitude increases in bandwidth hungry areas such as high definition video streaming.
Although 5 gs will provide revolutionary capabilities, the transition to 5 gs will be evolutionary. We see the first phase of this evolution being the addition of massive MIMO which will provide a significant increase to the capacity of the current 4 gs wireless network. The use case and benefits of Massive MIMO to the carriers are real. A massive MIMO system can deliver a greater than 3x data capacity increase in the same spectrum as a current 4 gs base station. And this helps to solve 2 large challenges for carriers, capacity and cost.
ADI is enabling these massive MIMO implementations today through our highly integrated software defined transceiver platform. This solution reduces the radio card area by a factor of 10 and overall remote radio head footprint by 50% while simultaneously reducing power consumption. These are critical success factors with massive MIMO systems since they use on average 8 times the number of radios compared to today's systems. Equally important, these transceivers have the flexibility to operate from 300 megahertz to 6 gigahertz as they are software programmable giving our customers a single platform based design that can quickly be modified to operate in any of the many different cellular bands that exist around the world. These radios can also scale from small cells to macro base stations to massive MIMO radios and they offer a flexible architecture capable of rightsizing the analog and digital performance needed by a customer's product family.
However, to realize the longer term 5 gs ambition, further network change is needed. In order to further expand the network bandwidth, millimeter wave solutions will come into play in order to provide multi gigabit per second wireless connectivity using phased array solutions. In that arena, ADI is leveraging the capabilities from our Hittite acquisition. We have a very unique market position of having deep competency from antenna to bits up through millimeter waves and our solutions and technologies are well positioned in the current millimeter wave trials around the world. This will expand ADI SAN as it emerges.
In addition to adding massive MIMO and millimeter waves, 5 gs will require a complete re architecting of the core wireless and wireline network including a move toward network virtualization and more edge computing. This advanced backbone network will be required to meet the 5 gs vision of greater than 1 gigabit per second download speeds, low latency, and high reliability demanded by mission critical applications such as digital healthcare, autonomous vehicles, fully autonomous factory floors, and augmented reality systems. This network expansion will drive a significant upgrade of the backhaul system opening a new stream of opportunity for ADI's optical and point to point microwave solutions. 5 gs represents an enormous opportunity for ADI as we are uniquely positioned to provide the enabling technology through our comprehensive portfolio of high performance mixed signal, RF and Microwave, and power management technologies. The combination and integration of these innovative capabilities will allow us to create even more comprehensive and compelling signal chain solutions for our customers and the opportunity to capture up to 3 times the bomb when compared to our 4 gs solutions.
Now while we're obviously excited about the remarkable potential of 5 gs, the greater volume of our communications business in the next couple of years will still be 4 gs. And here our business is strong and has been growing at a high single digit rate over the trailing 12 months. Our growth has significantly outpaced industry CapEx spend as we have seen share gains in traditional products, thanks to new RF offerings resulting from the combined strength of our ADI and Hittite engineering teams. Those results have been augmented by strong adoption of our integrated software defined transceivers across macro, small cells and massive MIMO trials. So in summary, we feel very confident and energized by our communications market success which is built upon close partnerships with our customers, our domain know how, our unwavering desire to solve the toughest engineering challenges, and strategic investments in research and development along of course with our acquisitions of Hittite and Linear Technology.
So looking forward, we expect to continue to outperform in the communications market and accelerate our growth as we fully address our customers' needs well into the 5 gs future. Of course 5 gs is just one of the many areas ADI is taking advantage of in the era of digitalization. In this ubiquitously sensed and connected world, there are many exciting new opportunities, areas such as Industrial 4.0, autonomous and electric transportation, and cloud computing. And in future earnings calls, I'll continue to speak to these opportunities with you and look forward to sharing how we are creating long term value for our customers and for our shareholders. And so, with that, I'd like to hand over to Prashanth.
Thank you, Vince. Good morning, everyone, and let me add my welcome to our fiscal 2018 Q2 earnings call. With the exception of non op expenses, my comments on the P and L line items will be on a non GAAP or adjusted basis, which excludes special items outlined in today's press release. Revenue for the quarter was just over $1,510,000,000 above the high end of our guidance and increasing 25% year over year and up 7% sequentially on a 13 week basis. Now before I move on to the rest of the P and L, let me give you some commentary around our market performance in the quarter.
Looking at the combined company, our B2B revenue increased 14% year over year, led by double digit growth in the industrial and communications markets. The industrial end market represented 52% of sales in the quarter. Growth in this market was once again broad based with nearly all applications and geographies increasing double digits compared to the year ago quarter. Momentum continues as our targeted R and D investments aimed at the underlying sector trends of automation, instrumentation and healthcare continue to drive outperformance. Turning to the comms market, which represented 19% of sales in the 2nd quarter.
Sales into both wireless and wired applications increased compared to the same period last year. Furthermore, our wireless business has increased at a high single digit rate over the trailing 12 months. Our growth is due to share gains related to our complete portfolio of high performance mixed signal RF and microwave, as well as the strong demand for our integrated transceiver and our position on virtually all of the 5 gs and massive MIMO trials. As Vince mentioned, we expect to grow our comms revenue at a mid single digit rate in the backdrop of a flat complex environment ahead of 5 gs rollouts and 5 gs represents an enormous opportunity for ADI as we are positioned to provide the enabling technology with our comprehensive portfolio. Our auto business represented 16% of sales in the quarter After a better than seasonal Q1, 2nd quarter sales increased at a low single digit rate compared to the year ago quarter with growth led by the infotainment and powertrain applications.
And finally, our consumer business representing 13% of sales in the Q2 and as previously communicated decreased compared to our year ago quarter. Let me now move to the rest of the P and L. Gross margins of 71.3 percent came in around the midpoint of guidance and increased slightly compared to the 1st quarter on a more favorable mix. OpEx in the 2nd quarter was $442,000,000 or approximately 29% of revenue. Strong revenue growth combined with operational execution delivered operating margins above 42% and at the upper end of our guidance.
Non op expenses in the 2nd quarter were $62,500,000 We expect our non op expenses to be approximately $58,000,000 in our Q3 and to decline by 2,000,000 to 3,000,000 in our Q4 of fiscal 'eighteen. Our 2nd quarter non GAAP tax rate was 5% as we adjusted the tax rate for the full year to 6%. Looking to the 3rd and 4th quarters, we expect our non GAAP tax rate will remain between 5% to 7%. There is no change to our expectation for fiscal 2019 and we continue to expect our long term tax rate to be approximately 12%. Non GAAP diluted earnings per share for the 2nd quarter came in above the high end of guidance at 1.45 dollars increasing over 40% year over year.
Now I'll cover the balance sheet. As we planned, inventory decreased 2% sequentially and days were 116 in the quarter, down from 124 days in the Q1. Distribution inventory was approximately 7.5 weeks, which is flat sequentially and up slightly compared to the year ago quarter. We generated record free cash flow of approximately $665,000,000 in the quarter with associated free cash flow margins of 44%. And in the trailing 12 months, adjusted free cash flow for the combined enterprise was $1,900,000,000 During the quarter we paid down $450,000,000 of debt which helped reduce our net debt to EBITDA ratio to 2.2 times, down from the 2.4 times in the prior quarter.
We expect to achieve our 2 times leverage ratio within the next two quarters. Capital additions in the second quarter were $54,000,000 and we expect CapEx for fiscal 'eighteen to run at our model of approximately 4% of sales. And during the quarter, we paid $178,000,000 in dividends with an associated quarterly cash dividend of $0.48 representing an annual dividend payment of $1.92 per outstanding share of common stock. So let's now turn to our outlook and expectations for the Q3 of fiscal 2018, which with the exception of revenue are also on a non GAAP basis and exclude items outlined in today's release. At a high level, we're expecting Q3 to look a lot like Q2.
We're planning for revenue in the Q3 to be in the range of $1,470,000,000 to $1,550,000,000 At the midpoint of guidance, we expect our B2B markets of industrial, auto and comms in the aggregate to increase approximately 10% year over year. We're planning for gross margins to increase approximately 50 to 150 basis points compared to the year ago quarter. And we expect our operating expenses to be flat to up 10,000,000 year over year. At the midpoint of guidance, this implies OpEx as a percentage of sales of approximately 29%. Based on these inputs, we expect operating margins in the Q3 of 2018 to be in the range of 41% to 43% and for diluted earnings per share excluding special items to be in the range of $1.38 to 1.52 dollars So to wrap it up, this was another terrific quarter for ADI and we set a few records along the way.
Our B2B business increased double digits year over year and our strong operational execution drove gross and operating margins higher which resulted in a record free cash flow in the quarter. And with that, I'll turn it over to Mike for our Q and A session.
Thanks, Prashanth. Now let's get to our Q and A session. Please limit yourself to one question. After our initial response, we'll give you the opportunity for a follow-up question. Jennifer, can we have our first question, please?
Our first question comes from Tore Svanberg with Stifel. Yes.
Thank you and congratulations on the strong results. First question for Vince, you talked about participating in 5 gs trials. Could you elaborate a little bit more on that? It sounded like you're participating in pretty much all of them out there, but if you could give some context, that'd be great.
Thanks, Tore. Well, as I said in the prepared remarks, there are really kind of 2 phases to 5 gs. At least from an ADI perspective, there is the pre millimeter phase and the millimeter phase and the pre millimeter phase is really dominated by this massive MIMO expansion which is really an overlay on 4 gs. So, our software defined transceivers are absolutely everywhere in the systems that are being brought to market this year and next year. In fact, it's one of the fastest growing product sectors inside ADI.
So that's been a very strong contributor to our communications business and in fact beyond. These transceiver technologies because they're so flexible are usable as well in places beyond communications. Also the combination of Hittite and ADI from RF to bits and microwave to bits is enabling us to capture new content in kind of pre-five gs systems. But it's the combination of our massive MIMO, our Hittite ADI Microwave and Millimeter Wave TO Bits technology that is enabling us to be participating in virtually all these field trials across the globe. My sense story is that U.
S. And China will be in the kind of 'nineteen, 'twenty timeframe, we'll be at least trialing some particular applications. China will get faster to mass market I think with what they call 5 gs which is really to me 4.5 gs plus massive MIMO. So I hope that explains what it is we're doing and in the run up to what will be pure 5 gs in the 2024, 2025 timeframe where the core network gets changed with virtualization, edge computing and pure millimeter wave type technology spanning multiple different frequency levels.
Thanks, Troy. Do you have a follow-up?
Yes, just a follow-up for Prashant. Prashant, with the gross margin being up year over year, is that mainly a function of mix or is there any other contributors there? I mean, obviously, the revenues are slightly higher, but is the main upside to gross margin year over year coming from mix?
Sure. Well, Tore, remember that we have now completed the implementation of all of our synergies related to the acquisition of Linear. So we now have built into our run rate the cost synergies that we committed to at the time of the acquisition. So that is contributing as well to the gross margin strength. And then I would also say that with volumes where they are, we're getting the benefit of strong utilization at our internal
fabs. Just to add that, we do have an additional $100,000,000 of cost synergies we talked about. So $150,000,000 is complete and we still have another $100,000,000 on the comp. Thank you. Great.
Thank you.
Next question, please.
Our next question comes from the line of John Pitzer with Credit Suisse.
Yes. Good morning guys. Can you hear business. You had really strong growth in the January quarter that decelerated pretty significantly in the April quarter, which was a little bit surprising, especially I think you said in your prepared comments that the linear business was achieving new all time records. So I'm just kind of curious, you've kind of been under growing your peers in autos, which was explainable over multiple years because of the MEMS part of your business.
But that should be a fairly small part of the business now. So I'm just kind of curious as to what's holding back growth in that market and how you kind of feel your long term position is in the auto space?
Yes, thanks John. So look, our business right now, our long term goal is to grow at the high end of kind of 2 to 3 SAR. And our objective obviously is to get the combined company onto that trajectory. So obviously, we're performing below my expectations and we're not happy as a management team right now as to where we are. But let me try and unpack the story a bit for you and bring you through where we are right now and what the pathway ahead is going to be.
So, we were clear on our last call that the growth profiles for ADI and LTC are quite different in the automotive sector today. ADI, the ADI legacy business increased at the kind of level of 2 to 3 SAAR in 2017 and it looks like we're on track again this year to achieve that kind of level. Whereas the LTC growth level has been in the low single digits or closer to kind of 1 SAAR. So, but what I will tell you is that we're making a lot of progress in improving LTC's growth rates and we've uncovered a lot of revenue synergy opportunities And we've also changed the business logic with an LTC and tilted more towards growth, profitability has always been important, will always be important, but we're also tilting more aggressively towards growth. But as you know in this market, it just takes time to materialize the design wins that we've got in place and my sense is those design wins won't materially impact the revenue, will not materially impact the revenue for a couple of years.
What I'd like to do is just turn my attention now to giving you a sense for what momentum we have in our business and what we're doing to get our revenue towards to get the growth levels to the higher end of the 2 to 3 SAAR. And as you know we've talked before we have 3 primary application areas in our business infotainment, autonomous driving and electrification. I'm going to talk to those in a little bit of detail and try and unpack the story a bit for you. So in infotainment, we've won a lot of premium audio sockets, that's a great heritage for ADI across all geos and that's really the foundation of the infotainment business and the good news there is we're now beginning to attach LTC power to the clusters of ADI, DSP and mixed signal technologies. We've talked before as well about our A2B technologies and we're really getting a lot of momentum there and what I can tell you is that about a dozen OEMs are planning to deploy that technology in the next few years across the globe in many, many geos.
Now that is also everything I talk about here is an opportunity for LTC power attachment. If I turn to autonomous vehicles, we haven't really talked much before about our LiDAR solution, but we're gaining design ins today in long and short range LiDAR systems with both the ADI mixed signal technologies and the LT portfolios and even getting some sockets for Hittite in very, very high frequency areas. And these components complement the more advanced capability that we're working on now to produce a solid state beam steering and photo detector technology. And that will dramatically drive the size, the cost, the power, and we believe Enable over the longer term, the kind of mid to long term 3, 4, 5 years mass deployment of LiDAR. And we got that new technology in terms of that more integrated system capability through the acquisition of Vessent sometime last year.
Also in autonomous vehicles, we have several design ins in place with our inertial management units or IMUs as we call them and we're engaged today in almost every self driving platform that is in development today both with what we would call traditional OEMs and some disruptors out there as well. So that technology which we've been using, we've gained traction in mission critical aerospace areas for example. It's a really ideal fit to the emerging autonomous vehicle requirements and it's used as a fail safe function in the event of a radar system failure. And I will turn to the electrification side of things and our BMS business which we got from our LTC acquisition, we've been winning back business that we might have lost or had lost and by changing again our business logic as I talked a little earlier about to tilting towards growth, defending our sockets aggressively and also leveraging the scale and flexibility of the ADI manufacturing system to change the kind of the cost profile of the products. And we're broadening LTC's customer base, bringing that technology into the strong relationships that legacy ADI has in North America and with European OEMs.
Also our next generation BMS will improve on our already leading performance levels by delivering again more miles per charge and bringing all the robustness and safety features to play as well. And one other aspect of the electrification business is the momentum that we have in our isolation. We have a franchise of very unique isolation technologies that tend to get used anytime that there's a high voltage and low voltage connection. So these technologies are very important in electrical vehicles, so I think we're doing well there and not to mention the broad based revenue synergies that we've got on the power side of things. My sense is that in a reasonable period of time, we should be able to add a point or 2 of overall growth to the automotive business, given the design cycles that we've got and the strength of the power portfolio.
So, I think we're very focused on bending the growth curve. I believe we're focused on the right apps, the right customers. We have a terrific technology story. And with the complementary customer bases and geo footprint coverage, I feel very optimistic about the future and our ability to get that growth curve to where we have publicly said it should be and will be. So I know that's a long answer, John, but I thought it was important to give the story in terms of where we are today and talk a little bit about the future as well.
Thanks, Vincent. Thanks, John. In interest of getting more callers on the call, we're going to move to our next call, Jennifer.
Your next question comes from William Stein with SunTrust.
Great. Thank you for taking my question. And thanks especially for the robust answers in particular around wireless and 5 gs, but there's a controversy brewing in that market with these decisions around ZTE as to whether you might or might not be able to ship components to them. I'm wondering two questions around that. 1, what does your outlook assume in terms of sales to ZTE going forward?
And second, how would a stop ship order to ZTE influence your view as to the growth of that market overall? In particular, might you see a sort of slowdown of adoption in China if they don't have 2 local champions? Thank you.
Yes, thanks for the question. So the way we view it in the short term, there is a certain amount of fixed CapEx in place to upgrade the various networks across the globe and particularly in China. So my sense is that there are many other competitors in play who will fill the demand for building out the networks across the globe. We have factored into our numbers a potential continued embargo with regard to ZTE. So, it's built into our numbers.
It was a small amount of our it was a small amount of headwind for the company last quarter. So, I think overall, most geos are up in communications for ADI, we're gaining share. And I think my sense is as well just we're obviously staying close to the situation, as best we can tell the negotiation outcomes that are taking place. But I will tell you clearly U. S.
And China need each other and I think trade between both is very, very critical. My sense is that sense will prevail and the need for free trade, unencumbered trade will prevail and we're expecting political leaders to figure this out. So my sense is at the end of the day there's demand there for more and more connectivity, carriers are determined to keep building their networks out, capture the opportunity, build the revenue and profit streams and that demand is going to be fulfilled one way or the other.
Thanks, Will. I think you put 2 questions in there. So we'll move to the next caller.
Our next question is from Craig Hettenbach with Morgan Stanley.
Yes, thank you. A question on consumer, you appear to be navigating the fall off at your largest customer. So just from kind of a high level, if you could just talk about the puts and takes from some of the drop off there versus other opportunities in areas where you're actually growing within consumer?
Yes, so as you know Craig, our consumer business is a tale of we've got 2 different stories there. 1 is our prosumer which looks a lot like our B2B market with lots of customers, products and different applications globally. And that business has been strengthened as well with the addition of the LTC revenue and applications and that's in the $300,000,000 plus area so it's a significant portion of consumer for ADI. We're expecting looking into our somewhere in the back end of Q3 and Q4, we're expecting what is normally a seasonally strong quarter to be so. We've stated previously that consumer will be down 20% to 30% for the year and this is how the year appears to be trending now.
So our strategy remains the same to focus our to leverage our technologies into areas of very, very high differentiation where we can get a high return on investment and we continue to execute against that strategy.
Thank you, Craig.
Do you
have a follow-up?
I do. Thank you. Just a question on free cash flow and kind of capital allocation for Prashant. So encouraging to see the big step up in free cash flow in the quarter. As you're on the doorstep of that 2 turns target for net leverage, can you remind us in terms of just priorities, be it acquisitions versus returning cash and how you think about that?
Sure. Thanks for the question, Craig. So, yes, it was a great quarter for us in free cash flow, but I do want to remind folks that our cash flow can be lumpy quarter to quarter. So the right way to measure us is on a trailing 12 month and we finished this quarter with trailing 12 months of 1,900,000,000 So we recognize that this franchise throws up a considerable amount of cash and therefore we want to be very thoughtful on how we deploy that excess cash once we achieve our 2x leverage ratio, which we would expect to do in the next two quarters. We're very mindful of the debt that we took on as a result of the Linear acquisition as well as the opportunities that we have in front of us with share repurchase dividend and potentially some other uses as well.
So it's something that we spend some quite a bit of time internally debating and I think you'll hear from us in a coming earnings release as we're ready to talk more about our capital allocation strategy once we clear that important 2x threshold.
Thank you, Craig and Jennifer. We are our next caller.
Our next question is from C. J. Muse with Evercore.
J. Muse:] Yes, good morning. Thank you for taking my question and sorry for those Celts. I guess if I could combine my questions into one large one. On the industrial side, could you share with us a little bit more detail in terms of what the drivers were there underlying that superb growth?
And then can you talk about the sustainability of that growth going forward? And then longer term, as part of revenue synergies with linear, clearly auto has been a major focus. But could you kind of, I guess, help us see what kind of underlying growth we could see from top line synergies in that segment looking out in the next 1, 2, 3 years? Thank you.
Yes, great. Thanks for the question, C. J. So the industrial business has been doing extraordinarily well. As you mentioned, we're we'll continue to be driving this with the technology investments that we've made.
It is across the board, C. J. It is all geographies. It is all products. So this is really a combination of the strength of a global expanding environment.
And you know the PMI continues to be in an expansionary phase, and that's compounded by the technology investments that have been made over the last several years, which have now come together at a time where you can really see the driver in automation. You can see the driver in our instrumentation business. So it's really across the board and it's hard to point to any one particular segment because it is so broad based and it's a reflection of the investments that have been made over the last several years. From where we sit today and you can see it reflected in our guidance for the coming quarter, we feel very strong about the coming quarter. The outlook is solid.
Our book to bill is greater than 1. Information from the channels, the information Vince gets from his customer visits are all continuing to tell us that we're going to see this run for a bit longer.
Thanks, CJ. I'll just remind you, our long term growth in that business, we say, is over 2x GDP. If you look at the 5 year CAGR in that business, it's right over it's about 8%, 9%. So that's kind of the long term growth for that business and we think that's a great growth for what 50% of our business and throws off great cash. Do you have a follow-up CJ?
Actually you put in 2 questions there. Let's move to the next caller.
Our next question is from Chris Caso with Raymond James.
Yes. Thank you. Good morning. The first question, a little bit of a big picture question. And based on your the comments in the prior question, it sounds like you do have a good degree of conviction that these favorable conditions will continue.
Can you talk about visibility you have into customer inventory levels into the channel inventory? And generally with amid the strong industry conditions, the ability you have to make sure that customers are ordering in line with their needs and not over ordering at this point?
Yes. Thanks for the question. So first, as a reminder, we have not moved to ASC 606. So remember that our revenue is recognized on sell through from the channel. So we really do provide our investors a reflection of what is the actual activity happening at the customer level.
The inventory that we're seeing in our channel now, roughly 7.5 weeks, that's relatively consistent with where we have been. And we would expect just through the normal course of business and over the course of the rest of the fiscal year, we'd expect to see that come down a bit. The inventory that we have in house is at 116 days. That's an improvement of about 8 days from where we were in the Q1. We are comfortable kind of in that 115 to 120.
So I think that's where you'll see us for the balance of the period. Our sales organization does work very closely with channel partners to monitor that order activity to ensure that we're being mindful of the order lead times and ensuring that behavior is appropriate. But I guess the biggest metric for us is the revenue we're reporting is on sell through. So it's really not impacted by any noise in the channel whether they're building or subtracting from inventory.
Yes, just another little bit of color on that. All the macro dynamics that we talked about it that I used in the I talked about at the start of my prepared remarks there benefit the industrial sector. So, my sense is from talking to customers globally, as has been the case at least for the last couple of years, they're pragmatically optimistic about the future that we're in a longer term secular growth trend across the various applications in industrial. And I think the optimism is even across automation, instrumentation and the aerospace and defense areas. So I think our customers are feeling good and I'm also feeling very, very good about where we are and where the market is.
Thanks, Vanessa. Jennifer, can we move to our next caller in the interest of
time? Your next question is from Ross Seymore with Deutsche
Bank. Hi, guys. Thanks for squeezing me in. Vince, thanks for all the wireless comms commentary earlier in the call. Just wanted to level set, how does your 20% roughly comms business split between wireless and the wired side?
And given that you gave us all that color on the wireless side, I wondered what your expectations were for the wired part of the equation?
Yes, good question, Russ. Thank you. Well, today with the acquisition of LTE, our business now is about fifty-fifty between wireless and wireline. And the wireless business, my sense is that can grow in the high single digits for quite a while to come. That's my long term growth objective in that business.
And wired somewhere in the kind of mid single digits as it has been growing, and I think that's a reasonable way to balance the growth expectations across that business. Do you
have a follow-up Ross?
Yes, and I'll make it a quick one for you. Vince, you mentioned a few times in this call about changing the business model at Linear to be a little bit more growth centric. Can you give us an idea given the long term design cycles? I know it's not going to be immediate, but when should we as investors start to see the benefits of those tweaks to the admittedly successful linear model turning to a little bit more growth centric?
Yes, I think the areas where we believe that we'll see the growth uptake in the shorter term, kind of over the next 2 years, that will be in the probably communications as well as automotive areas. We have sockets already in place now that we should see the uptake on. And it's going to take to get to what I would consider to be the objective to put a couple of points more total growth on the company's top line, it will take in the kind of 3 2 to 4 year kind of area. And if Hittite is any indication, given that the technologies play in similar markets, We're virtually 4 years into the closure of the Hittite acquisition and over that period of time we have managed to double the growth rate of Hittite in that period of time. So So given Ross that we expect for every dollar of ADI revenue which is largely mixed signal based, we expect a dollar of power.
That's the kind of opportunity spread we're looking at but it's going to take us 2 to 4 years I think to see any meaningful change to the top line.
Thank you.
Thank you, Ross. And we'll move to our last caller please, Jennifer.
And our final question comes from Craig Ellis with B. Riley.
Thanks for sneaking me in. And Vincent, thanks for the real tour de force of information on both auto and wireless. I wanted to follow-up on Ross' comment and maybe take a longer term look at the 5 gs opportunity that's in front of ADI. If we look back at the transition from 2 gs to 3 gs and then 3 gs to 4 gs, as you look ahead and look at 5 gs and the questions I have are 1, how do you expect pacing in the 4 gs to 5 gs revenue transition to compare to prior transitions? When do you think we get to a point where 5 gs would be a majority of communications revenue?
And relative to some of the growth rates that you talked about earlier on a sub segment basis, would you expect 5 gs when it becomes a much more material part of revenues to accelerate those growth rates? Thanks, Vincent.
Yes. Good question, Craig. And if you consider 5 gs to be the initial introduction of 5 gs to be adding massive MIMO to 4 gs core network, I think we'll see meaningful revenue in the 2020 timeframe. And I still think that 4 gs without massive MIMO will be a significant portion of revenue into the kind of 2022 timeframe. So somewhere between 2022 2025 we'll start to see what we would consider to be 5 gs become a more dominant part of our wireless communications infrastructure revenue.
So, at this point, Craig, it's a bit of a guess based on trying to triangulate and all the various conversations we have with carriers and customers. But I think, clearly we're starting to see the uptick in 4.5 gs or as it's called in China 5 gs massive MIMO based on 4 gs infrastructure at this point. So, hopefully that helps to give a bit of clarity to you.
Okay. Thank you, Jennifer, and thank you everyone for joining us this morning. A copy of the transcript will be available and all available reconciliations and information can also be found at the Quarterly Results section of our Investor Relations site at investor. Analog.com. Thanks for joining and your continued interest in ADI.
This does conclude today's Analog Devices conference call. You may now disconnect.