Q3 2020 Analog Devices Inc Earnings Call
I'd now like to introduce your host for today's call Mr., Michael could barely senior director of Investor Relations, Sir the floor is yours.
Thank you Sheryl and good morning, everybody. Thanks for joining our third quarter fiscal 2020 conference call.
The call today are 80, I C O Vincent Roche and 80, <unk> CFO <unk>.
Anyone who missed the release you divide it can relating financial schedules and besser dialogue dot com.
Onto the disclosures.
Information, we're about to discuss include forward looking statements, including statements relate to our objectives outlook and the proposed mattson transaction.
These forward looking statements are subject to certain risks and uncertainties escrow described in the earnings release are most recent 10-Q and other pure out reports and materials filed with the FCC.
Actual results could differ materially from the forward looking information.
These statements reflect our expectations only as a day to this call. We undertake no obligation to update these statements except as required by law.
Our comments. They will also include non-GAAP financial measures, which excludes special items comparing our results too.
The strong performance, especially over also excluded from prior periods.
Conciliations all these non-GAAP measures to their most directly comparable GAAP measures and additional information about risks that measures are included in today's earnings release and with that I'll turn over to 80 I C O Vincent Roche Vince Thanks, very much Mike and good morning to all I hope that you and your families are hoping insecticide.
Good my remarks today on a quarterly results and the current operating environment.
Before providing you with an update on our priorities.
This includes additional insight of course into our recently announced acquisition of Maxim integrated.
You know executed exceptionally well in the third quarter, despite the highly uncertain environment.
Demand was resilient, surpassing our expectations leading to stronger than expected result.
We saw continued strength in communications.
Across both wireless and wireline applications.
Sure So a record demand and other parts of our industrial portfolio switches instrumentation test also performed well.
Oh surprisingly the main area of weakness was automotive driven by global factory shutdowns and lower vehicle sales.
Turning to supply.
We're operating at normal capacity, which helped us through backlog and bring supply and demand into better balance.
Our team delivered third quarter results above the midpoint of our revised guidance with revenue of 1.46 billion.
Yes at $1.36.
B to B revenue was flat year over year under increased 11% sequentially and both gross and operating margins returned within the range of our financial model at 70% and 42% respectively.
We also generated $1.8 billion, a free cash flow for 33% of revenue over the trailing 12 months. This continues to place <unk> in the top 10% or the S&P 500.
These results further underscore the strength and flexibility of our business model again, any economic backdrop and I'm proud of how the 80 I team continues to deliver for customers.
Now I'll turn to an update on our strategic priorities.
We're focused on spending or capital efficiently the first called funding new product development.
During the quarter, we invested approximately $260 million, an R&D with more than 95% targeted at the most attractive b to b opportunities.
This continued reinvestment in our business is leading to excellent customer engagements I. Let me provide you know with a couple of examples.
And our communications business, we announced the collaboration with income to create a flexible radio platform.
That will enable customers to scale their fiveg networks more quickly and more economically the high performance all around compliance solution Leverages, our market, leading software to fund transceiver technologies.
This positions <unk> to expand our market leadership.
In automotive.
Our new road noise canceling solution is gaining traction since announcing our initial win with human died in February we thought it five more customers, including the North American leader in electric vehicles. This innovative solution reduces the car waived by almost 100 pounds and energy requirements by about 3%.
Potentially doubling our content opportunity per vehicle.
We're seeing great design momentum across our diversified industrial market also for example in factory automation customers are rethinking supply chains to make them more flexible with faster response times and to quicken. The pace of adoption. We are formed an alliance of partners to develop an open source architecture.
Excited to announce a fortune 500 health care customer is teaming with Eddie I hope upgrade its manufacturing capabilities using more connected robotics, thereby doubling our addressable markets.
I didn't space, we have design wins going to production this year with traditional aerospace companies, a new emerging disruptors that enable the proliferation of next generation communication satellites.
These satellites continuously change their position to earth and require space grade phased array and beam forming technology to create an uninterrupted connection.
And we're using the strong position in Florida to attach power technologies, thereby increasing our addressable market by a third.
Maybe I also remains committed to strong shareholder returns.
This quarter, we returned approximately $230 million through dividends recall, we post share buybacks due to the pandemic. This has helped US further solidify our balance sheet for the cash flow of more than a billion dollars.
At this point I'd be remiss to not discuss our M&A strategy.
The likes of the maximum acquisition.
Hey, guys selectively uses M&A to expand both our scale and our school in order to better address the future needs of our customers and deliver sustainable profitable growth.
Well cost synergies are an important element in evaluating any acquisition from our perspective, the most compelling benefits come from combining technology portfolios to capture new addressable markets and drive long term revenue synergies.
This revenue takes time to realize given the nature of the unload business, but our products deliver recurring revenue streams and cash flow for decades.
Therefore, we strive to achieve our return objective within approximately five years [laughter]. This timeframe allows us to not only achieved the stated cost savings, but also begin to capture the early revenue synergies.
And I think the acquisition of LTC illustrates the benefits of our strategy.
Our top priorities there were harmonizing the two organizations to create an entity that is better than the some of its parts to that end.
I'm proud to say that we've retained and invested in Otcs exceptional engineering talent together, we've created an exciting roadmap of high performance analog and power solutions combined.
We're exceeding our original 150 million dollar cost synergy targets and we're on track to realize the next $100 million exiting fiscal 21.
And from a revenue perspective.
With more than doubled our pipeline value.
We have over $500 million of lifetime revenue coming to market this year, increasing our confidence in Dublin Ltcs historical growth rates.
Without PC complete we pursued the acquisition of Maxim to strengthen our leadership from the unlock industry better positioning <unk> to capitalize on secular growth trends.
For the last five years Maxim is shifted its business strategy to focus on Pete to be markets, while enhancing profitability. As a result, Maxim has increased its beat to be revenue mix to approximately 80% of talking from 55%.
Expanded its gross margins by more than 500 basis points and increased its free cash flow margin by over 600 basis points. During this period.
Combined we're confident we will continue to improve maxims performance.
This will be driven by our cadre of engineering talent complimentary technologies and breadth of market applications I'd like to expand on a little here.
The culture is a very I'm back some are very aligned both companies share a commitment to innovation and engineering excellence with a combined team of more than 10000 to engineers and $1.5 billion of annual R&D investments, we will continue to be the destination for the world's best of luck.
[music].
And with three times the field technical resources will be better positioned to uncover cross selling opportunities and serve existing and new customers will have an increased need for application and design support.
In the area of power management.
Nexans application focused offerings are highly complementary with you guys more general purpose or catalog power portfolio.
Together, we will have a more comprehensive portfolio with approximately $2 billion of revenue. This is particularly important that's how is the largest and fastest growing analog subsidy.
And with increasing design complexity and the need for better efficiency.
System par challenges that our customers must overcome continue to rise in rise.
In automotive Axis is one of the Premier franchise is increasing revenue at a mid teens rates over the last five years.
There are a leader in high speed data connectivity for cameras radars and processors.
Serial link technology [noise].
Well 80, I is a leader in audio solutions, whether it'd be platform.
Both companies are well positioned in vehicle electrification, enabling us to better address automakers you'd be requirements, which continuously evolve.
Together, we will capture more of the increasing system content per vehicle and enable about her experience for the consumer.
Taking a step back the combined company will have unique positioning with 85% exposure to highly profitable long life beat to be markets.
Maxim strengths in the automotive and data center markets will complement 80, I strengths across the industrial communications and digital health care markets. Additionally, the combined company will have increased financial strength.
We expect a combination to be accretive to adjusted EPS within 18 months post close the targeted cost synergies of 275 million by the end of the second year.
We also expect to maintain an industry, leading financial profile as always we're committed to generating robust free cash flow and our goal is to reach the high end of our margin range a 40%.
With our lower leverage ratio at close we'll also have the opportunity to deliver enhanced cash returns to our shareholders.
I believe that together, we can grow revenue at mid single digits due to our alignment with important secular growth trends such as industry 4.0 digital health care.
Our next generation communication systems and vehicle electrification as examples.
So in closing we're seeing promising evidence got a broad based recovery is underway. However, we recognize that the recovery is highly dependent on the future impacts of the pandemic.
We views this unprecedented time to better align or organization and investments.
Into the most important areas.
We believe will emerge stronger and are better position to drive profitable growth.
I'm not sure today, we're very excited about the combination with Maxim, which will drive the next wave of disruptive innovation and deliver significant benefits for all stakeholders.
And with that I'll turn over to permission to go through the financial details and book.
Thank you Vince let me add my welcome to our third quarter earnings call.
As a reminder, my comments with the exception of revenue and non op expenses will be on an adjusted basis, which excludes special items outlined in today's press release.
When we provided quarterly guidance in May we were facing tremendous uncertainty just returning to normal capacity levels and experiencing volatile demand patterns across end markets.
As we progressed through the quarter, we saw stronger than anticipated demand that resulted in less cancellations and higher than anticipated backlog conversion.
With that as context, our results came in above the midpoint of our revised outlook.
With revenue of 1.46 billion operating margins over 42% and EPS of $1.36.
Let me start now with the end market color.
Our BTB revenue was up 11% sequentially and flat year over year, a strength across industrial and communications offset a sharp decline in automotive.
Industrial which represented 53% of revenue during the quarter finished up 3% year over year.
We experienced robust growth in health care instrumentation cast and energy applications. This strength with moderated by weaker trends across our broad market and automation businesses.
Communications, which accounted for 25% of revenue achieved a record quarter revenue finished up 14% year over year, driven by double digit increases across both wireless and wireline.
This strength came from our leadership position in Fiveg wireless systems, and our solid position in optical connectivity used in carrier networks and data centers.
Automotive, which represented 11% of revenue.
Creased, 29% year over year with all applications declining.
Due to global factory shutdowns and lower vehicle sales.
And well know business is immune to the current environment, our BMS and ATP solutions fared quite well Dms revenue increased sequentially and was down just modestly year over year due to our strong penetration across the ecosystem and increasing consumer preference for electric vehicles.
And given the continued adoption of our eight to be audio platform ATP revenue has increased over 70% year to date, despite lower vehicle sales.
Consumer, which also represented 11% of revenue was down 13% year over year.
Relatively flat portable revenue was more than offset by double digit declines in prosumer due to the pandemic related softness.
We continue to expect 2020 to be the bottom for our consumer business.
In addition to the end market commentary you wanted to provide some insight by geography as we believe it is helpful to investors in this current climate.
Most geographies declined year over year.
We saw double digit declines in Europe, and Japan, while the decline in North America was less pronounced.
The rest of Asia increased and China increased double digits year over year, largely driven by the robust growth in communications, given our solid position as well as strength in industrial.
Now moving on to the piano gross margins returned to our model at approximately 70% down modestly year over year from lower fab utilization.
We've accelerated the plant LTC factory closings and have started to realize these benefits in the third quarter, we expect additional savings in the fourth quarter and we'll exit fiscal 2020 with nearly half the 100 million dollar savings.
Run rate.
[noise] Opex was 402 million.
Up 3% sequentially, yet down 8% year over year.
We maintained a focus on controlling expenses, which included a one week global shutdown during the quarter.
Op margins finished at 42.3% the highest level since the third quarter of 2018.
Non op expenses were 46 million down 3 million sequentially and more than 10 million year over year, driven by lower levels of debt and lower interest rates.
Our tax rate for the quarter was approximately 11.5%.
And all told third quarter U.P.S. came in at about 36.
Now moving onto the balance sheet.
We finished the quarter with over a billion of cash and about 5.6 billion in total debt. This resulted in a leverage ratio of 1.8 times on a trailing 12 month basis.
Inventory dollars increased 22 million sequentially, but declined year over year days of inventory remained basically unchanged at 125.
Channel inventory remains lean and is below the low end of our seven to eight week target range.
Cash from operations was 557 million and Capex was only 21 million as we proactively reduced capex spend in the current environment.
This resulted in free cash flow a 536 million.
Up 8% year over year.
Our long term capex target remains the same at approximately 4% from sales.
And as Vince mentioned on a trailing 12, we generated 1.8 billion a free cash flow over.
Over the same period, we've returned around 860 million to shareholders via dividends and additional 410 million buybacks.
This equates to a free cash flow return after debt reduction of nearly 80%, which is below our 100% return target as we paused our buyback program.
Now I'd like to expand on Vince's commentary and desk, how and discuss our combination with Maxim will further enhance our financial profile.
That's deal announcement 18, and Maxim had a combined pro forma leverage.
Ratio of 1.2 times, which will decrease between today and deal close.
The main driver being Maxim, which isn't cash accumulation phase.
They will pay one more quarterly dividend before spending it for four quarters and their buyback is on pause said another way all the cash generation for the 12 month beginning in the second quarter of their fiscal 2021 will be added to the balance sheet.
And for reference over a trailing 12 month period, Maxim generated $730 million a free cash flow.
<unk> plans to continue to pay and grow our dividend and as I mentioned earlier, our buyback program was pause during the height of cobot 19 and will remain on hold for now.
When circumstances permit our intentions to reinstate the program, which has nearly 2 billion remaining under authorization.
Also as we previously outlined we plan on repaying 300 to 500 million of death in Twentytwenty.
This quarter, we intend to honor that commitment by retiring our $450 million January 2021 note.
This will save 13 million of annual interest expense.
We believe the stronger balance sheet provides us with flexibility to improve on our 100% free cash flow return and increase shareholder value over the long term through a combination of reinvestment in the business continued dividend increases greater and more consistent buybacks and targeted.
Acquisitions.
And now onto the fourth quarter outlook.
Fourth quarter revenue is expected to be 1.44 billion, plus or minus 70 million.
This outlook considers our current understanding of the impact related to the recent legislation enacted on Monday.
It's important to remember that this customers revenue has been significantly reduced over the last year to a low single digit percent of total sales.
We anticipate b to B revenue to decrease modestly for the third quarter.
Strong growth in automotive as well as growth in industrial is more than offset by a decline in communications.
This decline in communications, it's related to a slowdown of deployment as we forecasted left in the last call and the limited impact from the recent legislation.
On a year over year basis, BDP revenue is forecasted to increase low to single low to mid single digits.
We anticipate our operating margin to be approximately 42% plus or minus 100 beps.
Planning for the tax rate to be between 12, and 13% and based on these input adjusted EPS is expected to be $1.32, plus or minus 10 cents.
So now I'll close my remarks by stating the third quarter proved better than our expectations largely driven by our conservative planning and aggressive execution.
As we move through the integration planning process with Maxim, we remain fully committed to driving sustainable growth through cutting edge innovation and a focus on our customer success.
Got a pass it back to Mike now to start acuity.
Thanks, John.
Okay. That's good to acute day session I've listened to all your feedback about from questions. The number of questions on the call <unk>, we're going to run this little differently than normal I asked that limit yourself to one question <unk> allow time for additional participants on this call. This morning.
Sure. We my first question please.
Im triples participating by telephone dialing if you have a question. Please press star and the number one the on your phone. If your question have you answered if you wish to remove from the keys.
Please press the pound Keith if you're missing on the speakerphone. Please pick up the handset what asking your question.
So just a moment compiles acuity roster.
First question comes from John Picture from Credit Suisse. Please go ahead. Your line is open.
Yeah, guys. Good morning, congratulations on the solid result, I just want to follow up on on the recent department of Commerce ruling.
Am I to read into that that you've embedded sort of zero revenue coming from that one customer and just given how strong China's been as a region. Vince are you at all worried that there has been pull forward or is that just a natural offshoot of that's the GE over a lot of fiveg deployment is happening.
Yes. Good question. Thanks, John.
So we.
We are pretty much discount is our top what used to be our number one customer in China.
Two.
You know pretty much zero in our long term planning thinking a it has been a low single digit customer over the past few quarters. So.
Oh, we have factored also by the way the the latest regulatory or people into our numbers. So at this point in time.
You know the largest fiveg customer there in China that used to be is a is no longer part of the planning or be either in the short term or the long term.
<unk> as well what we've seen in terms of the strength in China that cushions referred to.
Is really is the fact that China was the first to go into the pandemic first to come out. We told me that is growing very very rapidly and husband or for several years no.
So you know I think there's been.
Very good balance I believe between supply and demand across all sectors. I mean, we've seen growth in all markets with the exception of all important.
So I think what we're seeing in terms of the the strength in China is more about the the match between the strength in our business in the economy than anything else.
Perfect. Thanks.
Our next question. Please thank you.
Thank you. Our next question comes from <unk> area from Bank of America Securities. Please go ahead. Your line is open.
Hi, Thanks for taking my question and congratulations on strong execution I wanted to follow up on on John's question about.
Communications business and I was hoping wins, if you could have to quantify how much communications could perhaps a decline sequentially and what are you baking in from this department of Commerce regulation and then.
I think that the bigger question data is that as we look forward to next year.
You can global Fiveg deployments can stay on track if while we doesn't get access the U.S. technology like I'd be really.
Completing a word were largely is not going to be applied at all and fiveg deployment and if that is such a word does it still yeah. You know mean that fiveg deployments globally can actually happened at the base people when thinking about before any any perspective would be very useful. Thank you that we're getting.
Going to split that in and let me take the first part of it or so to clarify third quarter. We believed did not see any pulling from <unk>.
Fourth quarter outlook reflects the guidance. We gave you reflects the full impact for us of the department of Commerce implications from earlier this week.
So all of that is now baked in in terms of the amount of a decline that we are expecting the communications business. This is a lumpy business. We've said that consistently its growth measured in years and lumpy by quarter, We don't give forward guidance out an end market basis.
Hi, my quarter anymore, we haven't done that for a little bit time. So we don't want to we don't want to start that now but.
Take it take it to understand that the the movement in the communications business from third to fourth quarter was very much in normal operating lumpiness of the communications business is not exacerbated in any way by what happened on Monday, or Tuesday Tonight, and now I'll pass factor because for.
You are more challenging strategic question.
So I've been in this business a long long time actually since two the inception of to GE all those years back in the late exerting nineties.
And what I can tell you is that patterns, we're seeing in Fiveg, we're no different to what we seem to GE threeg or fourg.
And if you look a fourg specifically just to give you a good of perspective here you know we grew albeit very very lumpy business as we always say, but we grew.
Over the entire era of its do those.
By mid single digits, a we had more content than we had in the prior generations, we took more share.
And we're actually even better positions in Fiveg, because it's a more complex reveal problem fundamentally we have a lot more technology.
Into the space from microwave Andorra.
The mixed signal.
No we're touching power also so.
You know another factor that we're beginning to see the emergence of so today's fiveg has really been about giving more bandwidth to the consumer more throughput to the consumer the future is a boats I think you to be more so than the consumer and we're beginning to see I suppose early.
Option of Fiveg in the factory automation area that diversify that some of our industrial automation customers as well.
So you know.
Threeq you.
It was definitely.
The highest revenue quarter this year.
But there are lots of drivers I see a secular local in the company level to keep us in good stead for growth over the long term.
That all had a one thing to try to avoid a plethora of Wally questions or I can tell or lighting up we'd give you a lot of contacts on that customer. We said there are mid single digit customer the legislation put in place.
You can ship for about half this quarter. So there will be lower this quarter than normal and going forward after that our expectation should be it goes to zero. So our outlook for one key would be down for communication because of that the last couple of quarters, but you've been low single digits and as we've said another couple of times, we are no longer factoring.
Well into our numbers.
Thanks to that thank you.
Charles next question please.
Cheryl are we still on the call.
I guess not.
[laughter] Pardon me. Your next question comes from Tory Jane Burke from Stifel. Your line is open.
Yes, Thank you and congratulations, especially during these these tough times.
I had a question on on sort of bookings linear already in backlog I know last quarter, you, obviously entered the quarter with.
Pretty high backlog and you've sort of discounting that.
Are we sort of back to more normal backlog level now for either you.
Vince or <unk> percent.
Yes, so, let's maybe well let me answer that by talking about the order patterns. So we saw we saw strong may some slowdown in June which was a expected July sort of a stable month over month and that was better than we expected.
Through August relatively stable and August is typically a lower seasonal so we have lower backlog in third quarter as we enter as we enter the quarter and a good balance between supply and demand this quarter.
Look forward to our guide we have.
We've got stronger coverage from backlog than we typically do and if we if we converted a if you're if you recall in the third quarter. We set there that we had about 50 million of products that we couldn't ship in the second quarter that we we caught up with in.
After that actually came in a little bit higher because we had we had fewer cancellation. So we probably had maybe a $100 million all in a revenue in third quarter that really related to backlog from second quarter. So I think that to that through fourth quarter, we're gonna get supply and demand back in balance backlog has come down.
And we'll we'll be more back to normal levels.
As we as we have guided for the fourth quarter, we've we've taken into consideration the stronger backlog, but we've also taken into consideration that at an 80 I level, our book to Bill for the for the fourth quarter is now below parity.
Thank you.
Thanks Corey.
Thank you and our next question.
Comes from.
Hi, I'm Trish Servaas stuff.
[noise].
Please go ahead your line is open.
All right Scott.
Hi can you guys hear me.
Just one of Russia.
Okay, Vince I I wanted to a pivot back to the strategic priorities and its Ben and thanks for articulating.
Everything in context of the a debt. The latest acquisition. This is the question I get a lot of and I scratch My head on this too.
Because if you bought linear and Max among some of the power side should there be the question and you did provide us with some some details on linear a couple of questions tied to that.
With respect to hit tight you have given US you know the growth in Hittite versus what it used to grow and how you have been able to two to grow that.
Versus prior to acquisition. So the question is houses linear done with respect to ER, the cooler business and I don't expect you to answer it every quarter, but but I think it's a pertinent question in light of the maximum acquisition. So kind of two part question when houses linear down since you bought it and then this was the.
Did that we were supposed to get your revenue synergy now this is the big Topsy turvy year. So so we all understand that but should be expect revenue synergies just talk showing up from linear although it all the efforts that have been doing thank you.
Yes. Thanks, Ambrish. So we have already seeing the benefit of LTC and our growth numbers I would say at this point in time, we've put more than 100 basis points of growth on the base linear.
A growth rate.
Todays.
We have I think the greatest indicator for what things are likely to be in the future I've said before that I believe that we can double the growth rate of Oh OTI over the longer term and just given the markets in which we play on the design cycles the product cycles takes.
Three years minimum then you'll begin to see the real benefits I think for five years.
So were over 100 basis points of out of growth right now and if you look at our pipeline I refer to it in the prepared remarks, we have.
You know got a design win pipeline over a half a billion. Thus far we have seen wins and communications full on the wireless side as well as the data center side.
Infotainment in automotive infotainment radar and of course BMS.
[music].
We're seeing.
Tremendous uptick for some of her more integrated products and areas like instrument instrumentation tests using or Micromodule technologies.
And I'm quite pleased given the you know the turmoil in the in the global markets right now that.
We continue to see good traction.
On the design win rates and I'm confident that we can get.
From 3% to 4% growth rates in the past two more you know a higher mid to high single digit level.
In the future undo it sustainable so I think we have emerging evidence that were on good truck to do that.
Okay. Thank you.
In summary.
Thank you.
Next question comes from Tinchy, sorry from Goldman Sachs Your lighting so.
Good morning, guys and congrats on the strong results.
Vince I had a question on your automotive business I'm curious how are you thinking about the shape of the recovery.
And automotive over the next couple of quarters, obviously, you've been impacted by your customer factory shutdowns and the demand up.
Situation post coded, but curious are you thinking you know it could be more of a V shaped recovery could it be more U shaped any thoughts there would be super helpful. If he can speak to your key applications within automotive you gave great color on the July quarter, but if you can talk about.
BMS aid to be some of the key growth drivers for October and beyond that would be helpful. Thank you.
Thanks, So she.
So yeah, we're seeing a recovery in the markets.
Our book to Bill.
Was greater than unifi across all regions over the last month or so.
And we believed that our third quarter represents the bottom of cycle for us so.
I think the near term recovery.
And that we're seeing relates to factories coming back into line.
And also a slow improvement in sorry, So I think you know the shape of the recovery really depends.
On the demands the end demand for for cars and hosts are actually grows.
And.
You know, we definitely need will need to see continued vehicle demands to get back to the pre coven levels. So it's not there yet so factories are coming back in line demand to slowly increasing so.
Article the exact shape, but somewhere between a of you're going to you I guess.
Maybe already at you and we're seeing the upsurge.
I would say electric vehicles in general have held up better in those markets are you know as we said in the prepared remarks.
You know, there's a strong consumer preference for electric.
Fastest growing sector at this point in time.
And we're you know we're continuing to gain share in the market we've seen a.
[noise] quarter on quarter in that space.
And we're also very pleased with our performance seems to be actually grew about a I think it was 70% a year to date.
So the adoption you know the.
The design wins that we had gotten last year across most of the of the Oems beginning to turn into serious revenue not on the top of that we're also overlaying.
This rule noise cancellation technology that uses our digital signal processors lot of Arrhythmic technology.
A different analog support technologies.
On the input and output there.
So those are the those are the major areas.
You know I think as I said I believe we're in a slow recovery phase in automotive and I think in general.
You know very hard to call the next quarter and orders, but my sense is 21 will be a growth year for the industry in the growth year for <unk>.
And I mean, that's how I view that as one of them. So we're seeing a gentle recovery in general across all our market spaces.
Thank you. Thank you next question please.
Thank you. Our next question comes from Stacy Rasgon from Bernstein Research. Please go ahead.
Hi, guys. Thanks for taking my question.
A little bit confused even saying, we're entering into recovery, but how do I square that with a book to bill going forward that is less than one.
I mean is it just com like how should I be thinking about book to Bill by segment and what does that imply for like a longer term trajectory.
Yes, great questions takes away the so I would say that certainly the a the communications business is a piece of that and Ah I would also say that ER, we when we look back at the the demand activity over the last last call.
Order too we feel very good that that was driven by by very kind of real demand based on conversations with customers, but there was probably some level of inventory building that was going on in there given that the inventory levels at our end customers were so low coming into this.
This pandemic they had taken a end customers really up the industrial level have taken their inventory levels down pretty significantly in 2019, and then the pandemic hip and so I.
I think some of the strength that the industry seeing now.
Has a little bit of that Oh, we normalizing that so so as we kind of look forward into fourth quarter. A there is a lot of a.
Oh of Uh Huh.
Opportunity for us and ER and I think that to that the new order activity.
Remains good overdues are declining so.
It's a I think I think we'll we'll have to let let another quarter to roll out we don't have enough visibility I think to tell you to tell you what the future portends, but.
We're not to we're not seeing is we're not seeing a sharp decline.
In order activity, but it is below one.
Got it okay, let's just to clarify something that.
I'm sorry.
We are guiding down sequentially, our book to Bill is slightly below one so it does go in tandem what we're saying and you're right to think about tell markets calm as much as much below on AWS a bit above one and dotted around around one so it all lines up to what the guys. We given the range we have given.
Okay. Thank you guys.
Thanks, that's it.
Thank you Hi, My next question comes from C.J. Muse Evercore.
Please go ahead your line is open.
Hi, Good morning. Thank you been taking the question I guess cycle question.
And you know if I look at your S. Four and you projected.
Revenues in there for fiscal 20 that roughly 170 million below what would your actually looking to accomplish here and so curious versus what you put there in the us for what led to the upside there and is that something that we should think can continue.
Beyond the October quarter.
She she did that was really around the timing of when we were having those conversations the.
If you look back the timing of when we were in those are the world's looked very different to us I think it looked different to everyone back at that period when when the pandemic looked like it was a ranging at a pretty sharp pace across a across the globe. So our S. Four probably reflected more of the uncertain.
I see that we had out there that has since.
Ben.
More more clarity hasn't brought.
Okay. Thank you.
Well go to our last question. Please.
Thank you our last question comes from Craig Hettenbach from Morgan Stanley. Please go ahead, Sir your line is open.
Yes. Thanks, just a question for Vince on the industrial market isn't really about the composition maybe the next couple of quarters. So certainly medical has been strong instrumentation had the more cyclical we arent. It's actually Autonation has been weak do you expect any reversal in some of that kinda.
By sub segment performance as we move forward from here and Achary papers.
Well we've seen.
Energy is a couple hundred million dollar business your forever, that's doing well.
Well, we're getting alone do design win.
Renewables areas, we've seen strong demand and in our test business supporting Fiveg <unk> data centers in particular.
And we're seeing more weakness and instrumentation and areas that relate more to capex.
If you look at aerospace and defense, which is an important part of our industrial story, obviously, there's weakness in avionics that won't be.
That will be a huge surprise.
But that's a relatively small portion the biggest portion of our aerospace and defense business is defense and that business is holding up well.
Well as the space business, which continues to.
To grow nicely I would say is what automation.
Is holding up better than we had thought.
But you know what really excites is there is the future or as our customers rethink supply chains onshoring reassuring.
And you know, we're going to see more and more automation use in general.
Cost of low.
So I think that impacts the story for you. So I think we're seeing strength pretty much across all the sectors are recovery across all sectors and industrial.
No.
Got it thanks.
Thanks, so much Craig.
Thanks, everyone for joining us this morning, I caught the transcript will be available on our website and all that cancellations and this information can also be found there.
Thanks for joining us in a continued interest and analog devices.
This concludes today's analog devices conference call you may now disconnect.
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