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Analog Devices Inc (ADI) Q2 2019 Earnings Call Transcript

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Analog Devices Inc (NASDAQ: ADI)
Q2 2019 Earnings Call
May 22, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to the Analog Devices First Quarter Fiscal Year 2019 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.

Michael Lucarelli -- Director of Investor Relations

Thank you, Sheryl, and good morning, everybody. Thanks for joining our second quarter fiscal 2019 conference call. With me on the call today are ADI's CEO, Vincent Roche; and ADI's CFO, Prashanth Mahendra-Rajah. For anyone, who missed the release, you can find it and relating financial schedules at investor.analog.com.

Now, on to the disclosures. The information we are about to discuss, including our objectives and outlook includes forward-looking statements. Actual results may differ materially from these forward-looking statements as a result of various factors, including those discussed in our earnings release and in 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 these forward-looking statements in light of new information or future events.

Our comments today about ADI's second quarter fiscal 2019 financial results and short-term outlook will also include non-GAAP financial measures, which exclude special items. When comparing our results to historical performance, special items are also excluded from these prior quarter and year-over-year results. 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. Okay.

With that, I'll turn it over to ADI's CEO, Vincent Roche. Vince?

Vincent Roche -- President and Chief Executive Officer

Thanks very much, Mike, and a very good morning to everybody on the call. But before I get into my recap of the quarter, I wanted to briefly touch on recent developments. As you're no doubt aware, the US government announced last week that it's restricting a large communications company from acquiring US products and technology. While this will have at least a short-term impact on our communications business, our business is global, broad and robust, and we'll manage through this. Prashanth will give a bit more insight into the anticipated financial impact of this development during his particular section.

So now onto our highlights. The second quarter of fiscal '19 was another successful quarter for ADI, with the revenue from our B2B markets increasing year-over-year once again. This represents the 12th consecutive quarter of annual B2B revenue growth, which is really a testament to the diversity of our franchise and our ability to innovate ahead of secular growth opportunities.

Revenue of $1.53 billion came in at the high end of our guidance, led by strong year-over-year growth from our communications applications across multiple segments. Adjusted gross and operating margins increased compared to last quarter to 70.6% and 41.5%, respectively. All told, adjusted EPS was $1.36, which was also at the high end of outlook. Now, over the past 12 months, we've generated approximately $2.1 billion in free cash flow or 34% of revenue and during that time period, we've returned more than 100% of free cash flow to our shareholders after debt repayments.

Now , before we move on to the financial section of our call, I'd like to continue our discussion around ADI's key markets, their trends and ADI's strategic initiatives, positioning us to capitalize on these opportunities. We previously discussed our strong position in the wireless market, particularly in massive MIMO and 5G where our content opportunity is up to 4 times compared to traditional 4G systems.

So today, I'm going to talk about the other third of our comms business, namely the wireline market. The wireline market is very profitable. It's a steady growth business for ADI with the combined Company having grown at a high-single digit rate annually for the past five years. The market and its challenges around precision, control and power are a perfect match for ADI's comprehensive portfolio and domain expertise. There are many applications within the wireline business, but today I want to focus on the fastest growing segment, namely the optical market.

The primary driver of the wireline market is unsurprisingly exponential growth in demand for digital data. IP traffic across carrier networks and data centers is doubling every two and a half years, driven primarily by cloud compute, backhaul of 4G and 5G networks and consumption of data rich content. This extraordinary growth represents a significant challenge for the carrier networks and data centers that transport and manage this data, as it's not possible to lay new optical fiber, our double data center floor space every two years. So their challenge is ADI's opportunity.

The two primary ways to solve their data throughput problem are increasing the speed of the existing fiber network and reducing the form factor of data ports to increase data density. Carriers are increasing their speed of their networks by upgrading from a 100 gigabits per second to 400 gbps. (ph) And in some cases to more than a terabit per second. At the same time, optical modules are being scaled down by 2X, 4X and even 10X. At this level of data throughput, our customers are pushing the optical components and subsystems such as lasers, modulators and coherent signal processing to their physical limits.

Precisely controlling throughput, managing synchronization, compensating for signal impairments and reducing system noise is critical to overall system performance. By partnering closely with our customers, we're developing highly optimized optical control and power management products that match the smaller form factor required in next generation optical systems. Importantly, for every 4X increase in speed in an existing network, our control content opportunity increases by more than a third. This 400 gig controlled port space is the fastest growing segment of our optical business, largely driven by the rapid growth in data center port traffic. But a high-precision signal chain only solves part of the problem in these next-gen carrier and data center networks.

Denser optical networks create power and thermal challenges that our customers must also mitigate to avoid harmful impact on the network's potential speed and data throughput, not to mention impact on their operating expense as power and cooling represent over 30% of the data center's total cost of ownership. That is a huge opportunity for our power portfolio. We're taking our core power franchises, namely micro module and silent switcher technologies, for example, and leveraging ADI's market leading position to broaden our customer reach and develop optimized solutions for this market.

In addition to optical port solutions, we also supply innovative power sequencing and hot swap products. These technologies enable our customers to mitigate costly downtime and the void disruptions by managing the highly complex power chain of networking servers and (inaudible) The addressable market for these solutions continues to grow as port and data traffic density continues to increase.

Now, I said in the past that for every dollar of signal chain we sell into a system, there is at least a $1 of power opportunity and the wireline market is no different. Since our combination with LTC , we've seen our pipeline in power for the wireless market expand very significantly. So in closing, we expect continued profitable growth over the long-term in the wireline market is control and power challenges intensify in response to the market's densification with the ever-increasing bandwidth demand. And thus provider shift for silicon photonics, we expect even more opportunity for ADI as control and power solutions are necessary to compensate for the lower inherent performance of these silicon-based photonic solutions.

And with that, let me hand it over to Prashanth.

Prashanth Mahendra-Rajah -- Senior Vice President, Finance and Chief Financial Officer

Thank you, Vince. Good morning, everyone, and let me add my welcome to our second quarter earnings call. My comments today 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.

Now, onto the quarter. In the face of geopolitical uncertainty, we are pleased to report strong second quarter results with revenue, operating margin and EPS, all coming in above the midpoint of our guidance. As usual, I will cover the end markets before moving to the P&L. Our second quarter B2B revenue increased approximately 3% year-over-year, driven by strong growth in our communications business.

The industrial market, which represented 50% of sales in the quarter performed as expected, decreasing mid-single digits compared to the year ago quarter. Strength in aerospace and defense was outweighed by the anticipated weakness in our automation and memory test businesses. The comps market represented 24% of sales during the quarter and experienced very strong double-digit year-over-year growth, led by ongoing strength in wireless, while our wireline franchise also continued to grow nicely.

Our results this quarter reflect ADI's higher content and share in 5G. We believe 5G remains in the early stages and our technology remains a key enabler. And as Vince, just highlighted in his section, our wireline business is well positioned to continue to grow profitably in the years ahead. Our auto business represented 16% of sales and was relatively flat compared to the year ago quarter. Strength in BMS, which increased well over 20% year-over-year and momentum in our power franchise helped to mitigate the overall weakness in vehicle units during the quarter. And lastly, our consumer business represented just 10% of sales in the quarter, the lowest consumer mix since 2016. As expected, this segment decreased on a year-over-year basis.

And now, moving to the P&L. Revenue for the quarter was at the high end of our guidance at approximately $1.53 billion, down 2% year-over-year. Gross margin came in at 70.6%, up 30 basis points sequentially, but lower year-over-year, primarily due to market mix. And what is normally a higher OpEx quarter, OpEx decreased sequentially to $443 million.

Operating margin of 41.5% came in stronger than our guided mid-point. Non-op expenses in the quarter were $61 million, slightly higher sequentially with the increase primarily related to a one-time expense in the quarter. Interest expense decreased quarter-over-quarter and year-over-year. Tax rate for the quarter was better than forecasted at approximately 11%. And all told, adjusted diluted earnings per share from the second quarter came in at the high end of guidance at $1.36.

Now, moving now to the balance sheet, as is normal in the second quarter, inventory dollars and days increased slightly sequentially. And our channel inventory also increased sequentially and year-over-year, but still remained comfortably in our target range. CapEx in the second quarter was $75 million or 5% of sales for the full year. We expect CapEx to be temporarily higher and remain at approximately 5%. This additional spend is to support future growth opportunities, especially for our power franchise, as well as the colocation of our product and business development teams.

Free cash flow was approximately $2.1 billion on a trailing 12-month basis, an increase of 6% year-over-year, despite the additional CapEx outlay. Over the past 12 months, we have returned more than 100% of our free cash flow to shareholders through dividends and buybacks, after debt repayments. In the second quarter, we repaid $250 million of debt, paid $200 million in dividends and repurchased over $100 million of our stock.

Now, before moving to guidance, I want to give some context around the additional uncertainty impacting this quarter's outlook. As Vince mentioned, the US government recently announced export restrictions to a large communications company. Our third quarter guidance takes into account the estimated impact on ADI from these restrictions, including no revenue from that customer for the remainder of the quarter. We are currently reviewing our ability to resume shipments under the recently announced temporary general license. And while we do not talk about specific customers, I will say, that ADI has an extremely diverse business. The communications market is a bit more concentrated but still, over the trailing 12 months our largest communication customers only represented mid-single digits or less as a percentage of total ADI sales.

So now on to the outlook, which with the exception of revenue and non-op expense are on a non-GAAP basis and excludes special items outlined in today's release. Third quarter revenue is expected to be $1.45 billion, plus or minus $50 million. And at the midpoint, we expect our B2B market of industrial, automotive and communications in the aggregate to decrease low-single digits year-over-year. At the midpoint of guidance, we expect third quarter operating margin to be approximately 40.5%, non-op expenses are expected to decline sequentially to approximately $56 million, and we are improving our projected tax rate to be in the range of 13% to 15% for the year.

Based on these inputs, the diluted EPS excluding special items is expected to be $1.22, plus or minus $0.07. So overall it was a very successful first half of the year for ADI, especially when you overlay it with an uncertain economic and political backdrop. I remained very confident that the investments we have made and continue to make will position us for continued outperformance over the long term.

Let me hand it back to Mike to start our Q&A.

Michael Lucarelli -- Director of Investor Relations

Okay. Let's get to our Q&A session. Please limit yourself to one question. After our initial response, we'll give you an opportunity for a follow-up question. Sheryl, can we have our first question, please.

Questions and Answers:

Operator

Thank you. (Operator Instructions) And our first question comes from Tore Svanberg from Stifel Nicolaus. Your line is open.

Vincent Roche -- President and Chief Executive Officer

Good morning, Tore.

Tore Svanberg -- Stifel Nicolaus -- Analyst

Thank you. Yes, good morning. Thank you. I was hoping maybe you could talk a little bit about your core business excluding communications. Obviously, I know that's a very specific situation. But if you look at especially industrial and auto, are those markets starting to show a path of recoveries? If you could add some color there, that'd be great. Thank you.

Vincent Roche -- President and Chief Executive Officer

Yes. sure. Thanks, Tore. Well, let me start with industrial. So I think it's true to say that business has stabilized across the board. We see our customers' inventory levels being very, very normal and also channel inventory, which is often a proxy for what's going on in the industrial market, is in line also with our targets. I think overall when the macro turns, I think we see a lot of upside improvement to the business, as confidence improves and CapEx is deployed at higher rates.

So if I try to unpack it a little bit for you. So in terms of the second quarter, it performed pretty much as we expected. And particularly, we were pleased with the results that we achieved in the aerospace and defense area where the combination of the hit item ADI signal processing solutions are really coming to the floor there, where we're taking share as a company, and we see that as a good steady growth driver for many, many years to come.

Geographically, I think it's true to say, where a lot of our industrial business is centered at Europe and America, we are up year-on-year, very stable. And the areas of weakness we saw were largely in Asia, all the various major regions of Asia. So looking out a little bit here, we're seeing stabilization and I think we will see some -- we'll see some annual growth in the third quarter here as well. So I think that's kind of the shape of the industrial business.

And if I just talk about the automotive sector for a little bit here. So our performance on revenue was a much better than units and SAAR. And we did see a very modest build in channel. We're on (inaudible) accounting these days when we report to the Street and that we don't see a little bit of growth there. But the performance was driven by our growing position in battery management systems for electric vehicles. I think also, I'm very pleased to say that our power business is improving across the board. We did better in power then SAAR for example. So when we look at our performance, power did better than the unit growth in terms of vehicles sold. And also our A2B solutions in the infotainment sector continue to ramp gradually here.

So -- I think if you look at more SAAR-exposed applications, steady-state applications, in infotainment for example, they were down high-single digits. And that represents about two thirds of the overall business. So I think the portfolio is very balanced. We've got many new things coming on board that help us to outgrow any particular weaknesses in SAAR.

Prashanth Mahendra-Rajah -- Senior Vice President, Finance and Chief Financial Officer

And Tore, I'll add one point. You asked about kind of stabilization. We are seeing stabilization in industrial market. And I think what we're excited about is, it's kind of a better decline year-over-year, we expect in the third quarter versus our second quarter results, o we declined about 6% in the second quarter. We think it's going to better in the third quarter on year-over-year basis.

Michael Lucarelli -- Director of Investor Relations

Do you have a follow up?

Tore Svanberg -- Stifel Nicolaus -- Analyst

Yes. Thank you for all the color, really helpful. As a follow-up, if we look at the communication customer that we're talking about here. How long will it take for a company like ADI to now maybe requalify some of that business with other potential customers? Thank you.

Vincent Roche -- President and Chief Executive Officer

Well, I think we're in a very, I would say, great situation here, Tore. We are very well covered as a company across all the various major OEMs with good penetration in fact, historically, high penetration across all the various OEMs. So I think I should start up this -- the conversation by saying that, generally speaking, 5G is a trend (inaudible) technology, and that is yet really to begin. I think we're seeing trials in Japan and Korea at this point in time. But it's really yet to begin and earnest in any volume. And that's probably going to come in the 2020 timeframe.

So no matter what happens, in terms of puts and takes, carrier and OEM relationships, I think the Company is well positioned. And specific to China, I guess it's a question of when deployments happen rather than, if they happen. And we still have to navigate a lot of uncertainty here in terms of the trade ban. So we're going to know a lot more I think over the next two, three months. But as I said, I think it's a case of when deployments happen globally rather than this. And we're in a good position in terms of the dollar content we've got at the various OEMs and our position across all the OEMs at this point in time.

Michael Lucarelli -- Director of Investor Relations

Thank you. We'll move to our next caller, please.

Tore Svanberg -- Stifel Nicolaus -- Analyst

Thank you.

Operator

Thank you. Our next caller comes from Vivek Arya from Bank of America. Your line is open.

Vincent Roche -- President and Chief Executive Officer

Good morning, Vivek.

Vivek Arya -- Bank of America Merrill Lynch -- Analyst

Thank you for taking my question. Yes. Good morning. Thanks for taking my question. And a good job on maintaining the profitability, despite all these macro and Huawei headwinds. Vince, it's interesting that your comments on industrial sound somewhat more optimistic than some of your peers, who have -- are looking at all this tariff situation, and they're sounding somewhat more downbeat. Is it some company-specific product cycles? How are you sounding a little more optimistic than what we are hearing from some of your peers?

Vincent Roche -- President and Chief Executive Officer

Yes, it's a good question, Vivek. We as a company, I think have been more focused on our peers in terms of R&D deployment and customer engagements over the last decade. And I think, we are generally speaking across the board, both at large say automation customers, tests, and lab-equipment type companies, and aerospace and defense, which I've talked a little bit about just a little earlier on, I think we are in a better share position though than we've ever been. It's a big, big part of who we are as a company. So there's tremendous engagements and focus.

And we have many, many tens of thousands of customers. So I think bringing LTC into the fold, as well, we increased the strength of our franchise in terms of signal processing, but also the power side of things with LTE. So I think it's a combination of all those things that has positioned with largely intrinsic or endogenous things we've done over the last decade, position us to take share here. So I think it's the strength of our franchise, strength of our customer relationships, and the combination with LTC, at this point.

Vivek Arya -- Bank of America Merrill Lynch -- Analyst

Got you. And...

Vincent Roche -- President and Chief Executive Officer

Do you have a follow-up?

Vivek Arya -- Bank of America Merrill Lynch -- Analyst

...yes. Thank you. So for the follow-up, I just wanted to make sure we are kind of all level set on what this ban Huawei actually means, right. So let's assume that, that ban stays in place, hopefully gets resolved. But for just the purpose of kind of record-keeping, there is no more Huawei-ish. Your July quarter kind of takes out Huawei, What is -- what should we assume from the following quarter? Should we just assume Huawei goes to zero after that? What is the right way to kind of de-risk the model from a Huawei perspective? Thank you.

Prashanth Mahendra-Rajah -- Senior Vice President, Finance and Chief Financial Officer

Yes. So for the current quarter Q3, we've presumed no more shipments. And if you take, I think your assumption is, let's assume that, that ban stays in place, then it's likely that we would be prohibited from continuing to sell to that customer for subsequent quarters. But as Vince has mentioned several times, we are largely customer agnostic. We have high share in all of the carriers. It's a very different situation than what we had in 4G. So as that demand shifts to other wireless infrastructure carriers, depending on where that deployment happens, we expect to continue to do quite well in providing the necessary technology to enable the deployment of 5G, and the continuing deployment in growth of 4G.

Vivek Arya -- Bank of America Merrill Lynch -- Analyst

Thanks, Prashanth.

Michael Lucarelli -- Director of Investor Relations

We'll go to our next question, please.

Operator

Thank you. Our next question comes from Harsh Kumar from Piper Jaffray. Your line is open.

Harsh Kumar -- Piper Jaffray -- Analyst

Yes. Hey, guys. Just a follow-on, I want to echo.

Vincent Roche -- President and Chief Executive Officer

(multiple speakers)

Harsh Kumar -- Piper Jaffray -- Analyst

Hey, good. Thank you. I want to echo my congratulations, as well, fantastic job in this rather turbulent environment. I want to follow-up on Vivek's question. Last time, we saw this the song and dance was ZTE getting banned, and the expectation was that Huawei would step up and take share. So basically if I hear you correctly, what I think you're saying is that the customer in question, Huawei if that's banned, you're suggesting that others, including ZTE might step up and take share, and the impact would be much less than perhaps the direct business that you do with Huawei. Is that the correct way to think about it?

Vincent Roche -- President and Chief Executive Officer

Potentially, yes. I think it really depends now on how the Chinese government and the various carriers, when they reflect in things, how they decide to handle the timing of 5G release at this point in time. But there are options. I think 5G conforms to a standard, and I think all the carriers have different options. They're probably our favorites, and then we got the first favorite, the second favorite, but there are options. And the way we view it, we are well positioned in terms of our technology portfolio. In fact, many of the things we're doing, particularly in 5G are highly differentiated, with more content, more coverage in the radio systems than we've ever had. So look, it will certainly help a lot, if this trade -- this ban is lifted in a reasonable time period here. But I think irrespective, as I said in my earlier comments. The rollout of 5G is unquestionable. And it will really be a question of timing rather than if the system gets deployed. So yes.

Prashanth Mahendra-Rajah -- Senior Vice President, Finance and Chief Financial Officer

Yes. Harsh, just -- I'll say -- I'll pack it a little bit from kind of a number standpoint. The things we looked at, we put together our guidance was there three factors. One was, the actual shipment to that customer; two, with the secondary impact to other customers who ship to that customer; and third would be additional demand picked up by competitors of that customer. And we put all that together, that's how we came up with our guidance. And we kind of think the second too, so the secondary impact or the additional share impact kind of neutralizes zero. So really it's all about that customer going to zero in our outlook.

Harsh Kumar -- Piper Jaffray -- Analyst

Fair enough, very helpful. And then, for my follow-up, we've been trying to talk to other semiconductor companies, and they're all very confused because of just it happened. It all happened so recently. A lot of the companies are saying well, they sell directly to Huawei, but they also sell a whole bunch to industry. Would you tell us if you guys are prohibited from selling to (inaudible) Huawei as well or is there a chance that stuff could -- shipments could be moved around a little bit and perhaps, I'm not seeing the full impact is mitigated, but some partial impact is mitigated at this point.

Vincent Roche -- President and Chief Executive Officer

That's a reflect. We're as confused as everybody. The information flow is bursty and it can be often confusing. So I think the coming days -- the coming weeks will bring a lot more clarity to what's actually in the ban, what's out of the ban. But as Mike said very clearly right now, our interpretation is that we will be upholding the ban to the fullest extent and we won't be shipping anything to Huawei for the foreseeable future.

Harsh Kumar -- Piper Jaffray -- Analyst

Yes.

Prashanth Mahendra-Rajah -- Senior Vice President, Finance and Chief Financial Officer

And for the avoidance of doubt, we have no channel revenue in the midpoint of our guidance that we expect to go on to this communication customer.

Harsh Kumar -- Piper Jaffray -- Analyst

Understood, very helpful. Thanks guys.

Michael Lucarelli -- Director of Investor Relations

Harsh, thanks for the questions. We'll take the next one.

Operator

Thank you. Our next question comes from Harlan Sur from JPMorgan. Your line is open.

Harlan Sur -- JPMorgan -- Analyst

Good morning. Thank you for taking my question. The defense spending budget for this year has been a real tailwind for the team, and it's actually have been quite broad based, right, modernization, aircraft, ground systems, missile defense, and so on. A&D obviously has been doing well for the team. Can you just help us understand how A&D has been growing on a year-over-year basis? And then how has the budget focus on modernization help to kick off maybe some new potential initiatives for the team?

Vincent Roche -- President and Chief Executive Officer

Yes. Harlan, we don't talk much at the specific segment level in terms of numbers. But I will share that our aerospace and defense has been doing particularly well, and it was one of the items that helped us offset some of the decline we saw in other industrial. The overall -- sort of in the second quarter results, the -- that year-over-year growth was pretty substantial, I call it north of 25% on a year-over-year basis for aerospace. We are benefiting from those record military budgets that you've meant. So it's across all of our application areas, the communications, the UAVs, radars, space exploration areas. The combination with Hittite also helps bring a lot of new technologies that we can take advantage. So it's been a great business for us and we see that continued modernization of defense is going to pay dividends in growth for ADI for several quarters to come.

Prashanth Mahendra-Rajah -- Senior Vice President, Finance and Chief Financial Officer

Just to level that on the call, our industrial business is 50% of sales, but it's very diverse within that 50%. So I'll just remind everyone that aerospace and defense is about 20% of industrial, automation is about 20% of industrial, instrumentation is about 20% to 25%, healthcare is just above 10%, and then there's remainder across a bunch of, I'll call it, smaller customers. So it's a very diverse business within Industrial for us. Do you have a follow up, Harlan?

Harlan Sur -- JPMorgan -- Analyst

Yes. Thank you. I appreciate the insights there. So within the comms business, really appreciate the insights on some of the new opportunities in optical, especially around signal processing and control. I believe that within wireline over the past couple of quarters, you've seen some weakness in 100 gig for optical networking targeted at cloud data centers, on the well-known set of capacity digestion by the hyperscalers. Are you guys starting to see fundamentals and 100 gig starting to improve kind of near-term?

Prashanth Mahendra-Rajah -- Senior Vice President, Finance and Chief Financial Officer

Yes. Harlan, our wireline business has been growing. In the last quarter, it grew mid-single digits year-over-year and the quarter before that was above 10% year-over-year. So I think it is impacting some. Our wireline business have been quite a steady growth market for us. It's been overshadowed by the wireless, also that we grow much faster, but the wireline for us and optical within that has been growing.

Vincent Roche -- President and Chief Executive Officer

Yes. I think data centers today still largely 100 gig based, but the fastest growth we are experiencing is in 400 gig. And that's both the kind of the metro long-haul, as well as the data centers. So as this data need continues to double every two and a half years, we're going to continue to see an aggressive movement to 400 gig, and in fact to a 1 terabit and beyond over the coming few years here. So I think it's a mixture and we're seeing strength across the board in our portfolio.

Harlan Sur -- JPMorgan -- Analyst

Okay. Thank you, very much. Thank you.

Michael Lucarelli -- Director of Investor Relations

Thank you, Harlan. Sheryl, next caller, please?

Operator

And our next question comes from Ross Seymore, Deutsche Bank. Your line is open.

Ross Seymore -- Deutsche Bank -- Analyst

Hi, guys, thanks for let me ask my questions. First, congratulations on the automotive business being flat year-over-year, as a solid quarter by any measure. I know, Vince, you gave...

Vincent Roche -- President and Chief Executive Officer

Thank you, Ross.

Ross Seymore -- Deutsche Bank -- Analyst

...the color on some of those drivers with BMS et cetera.

Vincent Roche -- President and Chief Executive Officer

Yes.

Ross Seymore -- Deutsche Bank -- Analyst

But from a bigger picture perspective, you guys had been underperforming for a few years and now you're outperforming. Is this sign of an inflection point that you think like going forward, you can go back to at least performing in line with peers or even outperforming? Or do you view this is just kind of one quarter of an improvement in that regard?

Prashanth Mahendra-Rajah -- Senior Vice President, Finance and Chief Financial Officer

So Ross, let me level set, how we did in the first half, and then let Vince kind of talk more broadly. So first, remember that we run our business on a -- we run the channel really on a POS basis, but we report our revenue on a POA basis. So in the second quarter, POS was down just slightly, very low-single digits, a but much better versus units. So we did see a little bit of modest build in the channel and that helped growth. But within that, certainly very strong performance in BMS, power and A2B. Vince mentioned that we've got the cabin electronics and some other businesses exposed to SAAR.

So as we look forward to the second half of this year, a little bit of that channel build that we saw in the first half is probably going to provide some headwind, because we can -- we do manage the business on a POS basis. But the optimism that we have been talking about for over a year now, and the inflection in our auto business that we really expect to start in 2020, that remains a high conviction. And I'll let Vince maybe talk more about what's behind that.

Vincent Roche -- President and Chief Executive Officer

So Ross, if we go back several years, we withdrew R&D and support. We still ship some sensor products. But we've largely seen the -- I think the tailing off of some of our more commoditized MEM-sensing business begin to stabilize there. If I look at the areas where we're seeing the growth come from as a company, I think our infotainment business remains very, very strong. It's been growing year-on-year now for several.

BMS, you know, still a very, very small penetration of electric vehicles in overall SAAR. And by the month, we get more and more convinced, but that's going to be a very significant business for the Company and that's -- that business is doing better and better for us. In fact, we have been capitalizing that business as well. We -- and also if you like, the portfolio from LTC. So we've been capitalizing the business in terms of R&D and equipment to make sure that we can meet the upside demands here for new products, as well as supply line for the long term.

I mentioned a little bit earlier on as well that our power business, the LTE portfolio is doing increasingly better when compared to the market at large. And when you take these new emerging level 3, level 4 sensing systems that need product modalities like IMUs, that feed these advanced image quality radar systems and lidar, we are in virtually all the really important high-end solutions that are emerging at level 3 and above.

So I think our business has been largely the (inaudible) the headwind on our business from the sensor side of things is baiting and these new product modalities are getting stronger and stronger in terms of direction. So that's kind of a story in automotive for you.

Ross Seymore -- Deutsche Bank -- Analyst

That's very helpful.

Vincent Roche -- President and Chief Executive Officer

Do you have a follow up?

Ross Seymore -- Deutsche Bank -- Analyst

Yes. I just want to pivot back to the comm side of things, and appreciating all the uncertainty and the details you've given on the call thus far. One other aspect that investors are focused on is the inventory in that area. And I know it's difficult to discern. But how are you viewing any pre-buying that might have been occurring, specifically from the now banned customer? And I think what people are concerned about is, even if the ban ends, was there enough pre-buying buffer that the snap-back afterwards might not actually occur. So any color you could have on the inventory in that channel and specifically any pre-buying would be appreciated. Thank you.

Vincent Roche -- President and Chief Executive Officer

I think the inventory in general, Ross, across the board, all our OEMs in the communications area, these new advanced architectures, I think the inventory is very, very well balanced. I don't see anything untoward or anomalous. And I think things are in good balance there.

Prashanth Mahendra-Rajah -- Senior Vice President, Finance and Chief Financial Officer

Yes. Ross, I'll say, even before the ban came in place, we expect our communication business -- we thought before the ban (inaudible) grow sequentially. So I don't think pre-buy was a big worry of ours, given our good share across the board. Now that obviously has changed and we think it's not going to grow sequentially. And probably on a year-over-year basis, it's only up slightly, kind of help you with some context there.

Vincent Roche -- President and Chief Executive Officer

Yes. And I think the way to think about this as well. In terms of inventory balance, like most of ADI's portfolio, it's really more a question of when the inventories that we have sell rather than if, I think that's generic to all these core B2B businesses for ADI.

Ross Seymore -- Deutsche Bank -- Analyst

All right. (multiple speakers)

Michael Lucarelli -- Director of Investor Relations

Thanks. Let's move to our next caller, please.

Operator

Our next question is from William Stein from SunTrust. Your line is open.

William Stein -- SunTrust -- Analyst

Great. Thanks for taking my questions. First, I'm wondering if you've analyzed or if there's any impact we might expect from additional stop-ship orders that have been speculated in the press. For example, I think it's pronounced Hikvision. I might not be getting that, right. But I'm wondering if you have any exposure to these surveillance companies in China that look like they could potentially be customers?

Vincent Roche -- President and Chief Executive Officer

Well, it's a good question. I would emphasize that the rest of the ADI business is very broad and diverse. So as more companies may be identified, there will certainly be some analysis that we will have to do. But unlike the communications business, which is among our most concentrated, the diversity of our franchise, and the large number of customers that we sell to, provide great insulation, against having kind of macro shocks from these political impacts.

William Stein -- SunTrust -- Analyst

That's really helpful.

Vincent Roche -- President and Chief Executive Officer

Do you have a follow-up?

William Stein -- SunTrust -- Analyst

One more, if I can. Can you talk about both for the quarter just posted and for the guidance the trends within the consumer business and specifically the split between your traditional prosumer business, and in the more volatile handset part of the business? Thank you.

Vincent Roche -- President and Chief Executive Officer

Yes. So we've -- we had originally said the -- that consumer is going to be down 10 to 20 in 2019, our forecast is really now at the high end of that, We expect to be down 20% year-over-year. We continue to see some weakness in the portables market. We are seeing a little bit of unanticipated weakness in prosumer, and how much of that is driven by the macro environments and such we're trying to assess right now. But we do think that kind of the worst is behind us and that the long-term growth for the prosumer business would -- should really align closer to GDP. And it's really similar to our B2B business.

Prashanth Mahendra-Rajah -- Senior Vice President, Finance and Chief Financial Officer

Yes. From a standpoint, as we exit this year, we expect our portals business our prosumer business to be about equal in size. So as it provides some more stability to that consumer business for us going forward.

Michael Lucarelli -- Director of Investor Relations

All right. Sheryl, we'll go to our last question please?

Operator

Thank you. Our last question comes from Ambrish Srivastava from BMO. Your line is open.

Ambrish Srivastava -- BMO Capital Markets -- Analyst

Hi. Thank you very much for squeezing me in. I just wanted to make sure I understood the exposure to the large customer. And in terms of the model, Prashanth, should we'll be thinking -- you gave us a trailing 12-month number, but should we'll be thinking high-single digit? And then based on your answer to an earlier question, in terms of de-risking the model. Should we assume for the next two, three quarters, you get none of that, and then you start to other customers to pick up slack maybe two, three quarters down the road. Is that the right way to think about the model, and then the OpEx impact, as well?

Vincent Roche -- President and Chief Executive Officer

Hi, Ambrish. I'll answer the first part of your question. So I think we're pretty clear on the prepared remarks, saying our largest customer within comms was mid-single digit at most on trailing 12 months. We did have a couple of weeks of shipments, I will say in this quarter. So that won't repeat next quarter. And after that doesn't repeat in 3Q, output zero in going forward until the ban is lifted.

Ambrish Srivastava -- BMO Capital Markets -- Analyst

And the OpEx trajectory, how should be think about the OpEx?

Prashanth Mahendra-Rajah -- Senior Vice President, Finance and Chief Financial Officer

Look, the OpEx, is that we're going to continue to invest in the business. Of course, where appropriate, we're going to look at our discretionary cost. But I wouldn't make a meaningful change to how we think about the OpEx. The first lever that absorbs the shock of a revenue decline is our variable compensation, so that will of course be impacted by a decline in revenue. But beyond that, we're going to -- we're committed to investing today for products and technologies that come to market several years out.

Vincent Roche -- President and Chief Executive Officer

I think the way to look at it Ambrish is that the demand for our technologies is absolutely unprecedented. So we're keeping our eye on the long-term in terms of making sure that we have new aggressive funding in place to fund all the R&D programs that we think are critical to the Company's future, the same with our customer engagements. And I mentioned with a while ago, also, we've ramped our capital expenditures to make sure, particularly on the LTE side of the business that we have, what we need to get our products to market faster, and get the supply to our customers, that we know the opportunity is there. So we're keeping our eye on the long-term price here.

Michael Lucarelli -- Director of Investor Relations

And do you have a follow-up, Ambrish?

Ambrish Srivastava -- BMO Capital Markets -- Analyst

That makes sense. I did. Thank you for all the the clarification. Just a quick one then. In your B2B guide, I think, Vince, you mentioned you gave the color on the industrial. And then should auto, we should expect that to be up year-over-year in the current quarter that we're in? Thank you.

Michael Lucarelli -- Director of Investor Relations

Hi, Ambrish. Yes. Vince gave some comment. Industrial should actually -- should be down year-on-year, but the growth rate will be better than the second quarter (inaudible) industrial first off. Also, I would say probably down year-over-year, but much better than what, I would say units are doing out there to the things we've talked about in the other Q&A remarks, BMS and power, and ADB ramping. And communications, we also discussed it should be about, I would say flat to up slightly year-over-year. So that's kind of help you get to that low single-digit guide for B2B, as a combination.

Ambrish Srivastava -- BMO Capital Markets -- Analyst

Awesome. Thank you.

Michael Lucarelli -- Director of Investor Relations

Okay. With that, thank you, Ambrish, and thank you everyone for joining us to this morning. A copy of the transcript will be available on our website, and all available reconciliations are also be on the website. Thank you. And we'll talk to you guys soon.

Operator

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

Duration: 46 minutes

Call participants:

Michael Lucarelli -- Director of Investor Relations

Vincent Roche -- President and Chief Executive Officer

Prashanth Mahendra-Rajah -- Senior Vice President, Finance and Chief Financial Officer

Tore Svanberg -- Stifel Nicolaus -- Analyst

Vivek Arya -- Bank of America Merrill Lynch -- Analyst

Harsh Kumar -- Piper Jaffray -- Analyst

Harlan Sur -- JPMorgan -- Analyst

Ross Seymore -- Deutsche Bank -- Analyst

William Stein -- SunTrust -- Analyst

Ambrish Srivastava -- BMO Capital Markets -- Analyst

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