Analog Devices, Inc. (ADI) Earnings Call Transcript & Summary

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All right. Great. Good afternoon, everyone. I'm Chris Caso, semiconductor analyst for Raymond James. Welcome to day 3 of our technology conference. Our next presentation is Analog Devices. With us from ADI is Mike Lucarelli who leads their Investor Relations. Mike, thanks for joining us today.

Sure. Thanks for having us, Chris.

Absolutely. It looks like you're very comfortable there in your meeting room. We're good -- glad to have you. Let me just get through some of the logistics here, just for everyone, before we get started. The meeting's a little bit different than a regular Zoom meeting. [Operator Instructions] We've got 40 minutes.

So Mike, maybe just to start, maybe you could go over some of the Q4 results and kind of what your expectations were going into the fourth quarter, to kind of set us up. We've heard a lot of things from a lot of different people that will try to run by you that I'm sure you've heard as well. But maybe you can kind of set up the near-term conditions, what ADI is experiencing as you enter the new calendar year.

Yes. Sure. Good start, Chris. Yes, we reported our earnings the week of Thanksgiving. It feels like months ago in this new COVID world, but it's only 2 weeks ago. We reported really strong results. We came above the top end of our revenue guidance. And really, what drove that outperformance, auto was very strong. Industrial did quite well also. Comm did slightly better than we thought. It was still down sequentially, but it did a little better than we thought. And consumer did in line with what we thought. Result of that is our gross margins returned to our 70% level, kind of our target level in the fourth quarter. And I think as you look into '21, I think they maintained a 70% level throughout the year and get better throughout the year as well. Margins were about 42% in our fourth quarter. So really good results exiting the year. It really was a year, for us at least, to have the first half as weak because of COVID. The second half is much stronger. And for our business, we saw sequential growth in revenue, each of the 2Q, 3Q and 4Q, and really exiting the year in a strong position. As you look to '21, we think '21's pretty strong, if not a very strong growth year for us, given the way we're entering the year. Inventories are lean for us in the channel. Industrial, it seems upticking, especially in the factory automation side. Automotive, like I said, was strong. The strength continues into our fiscal first quarter or calendar fourth quarter for those who report on a calendar basis. And comms is a little bit weaker here into the back end of the year. Not surprised. It's very somewhat like a year ago when back half of the year was weaker. And consumer, really more for ADI specific, consumer we think bottomed in '20. I mean those who have followed ADI know, consumer, we had a big design win. It's like about 3 years, that's washed out. Revenue from that large sock is 0 exiting the year. And with new design wins, not really at that customer, what we call broad-based customer and applications, we think we'll grow next year. Now I want to say it's heroic growth, I think we'll call it 1%, 2%. But 1% or 2% growth isn't bad when the market has been down 15% plus from the past 3 years.

Right. And what about some of the cyclical factors that we all watch in terms of where the order rates are, where the customer inventory levels? Because it's been a very abnormal year. Things have been up and down all year. Where do you think that stands? And kind of, those cyclical dynamics, where does that fit as you go into next year?

Good question. Yes, I would say there is no normal anymore. I think the new normal is no normal. I think if we look...

[ Indoor stat ].

[ Indoor stat ]? All right. Yes, it's a good question, though. Let's look at kind of the industry. The industry itself, I think what some investors and people forgot was how '19 was not a good year. Auto was down. Industrial was down. There was leaning out of inventory in '19. Starting in '20, you start to see demand pick up and things getting a little better in those markets. And then COVID hit, and we had shutdowns and inventory got extremely lean. Fast forward to the summer, industrial picked up, autos picked up. So you're seeing strong demand and the same kind of lean inventories across our customers and our supply chain. I would say, some of the demand today is probably driven by restocking of inventory, especially in auto. I mean supply chain is shut down for a full month, if not more. And as a result, you have production on the auto side likely above, I'll call it, sales. And so we're above the trend line there. This is an industry comment, not for ADI. And you're seeing replenishment. Demand's stronger, replenishment of inventory in automotive, probably a little bit in industrial as well. The communications side is a little different. Comms had a strong year throughout the year, and we actually saw inventory buildup throughout the year, like it should have, and we've seen those deployments of 5G, especially in China and Asia region, happen now. And that's kind of what you're seeing as a pause of 5G into the calendar fourth quarter, and then you'll see another ramp-up of that in '21. And then also, you look at ADI specifically, for our -- if you look at our orders and lead times, we had shutdowns in March and April on our back end of the test. Lead times spiked, orders spiked, the typical cyclical dynamics you see when that happens. What's great is over the past 6, 7 months, we put on more supply. We're back at running at normal capacity. Our lead times have come down. We're shipping nearly in line where we want to be. Our target is to ship over 90% of our products within 6 weeks. I wouldn't say we're there, but we're darn close. And as that -- as we brought those lead times in, orders have maintained to be strong. And to us, that's a read that demand is real, right? There's no really worry about getting supply from ADI. Sure, there's pockets of extension here or there like in any upturn. But in general, there's no worries, and orders still continue to remain strong over the past, call it, 6, 7 months and into December. For our channel, our channel inventory is very lean. It's -- our target is 7 to 8 weeks. We're just below -- I'd say a bit below now, 7 weeks. So as you look to '21, our goal is to replenish the channel to get back to that 7- to 8-week level. Why? That level -- that 7- to 8-week level is a good for supply for our customers, and we think the right thing to do is get there. So over time, it will happen in one quarter, probably not in 2 quarters. But over the course of the year, you'll see us put more inventory into the channel.

Right. One of the things we've heard pretty consistently with the companies we've spoken to this week and even outside of our conference is supply constraints right now, probably resulting from the fact that, that just demand has come back more quickly than some of the customers had expected. You may have seen NXP made some headlines. They released a letter to customers. We've heard, actually, some others, Infineon, Renesas also issued letters to customers advising of tight supply. It sounds like maybe that's not something that you're seeing, and maybe that's something that's specific to other customers. Maybe you can just talk about supply constraints and availability in general.

Yes. Yes. So far, so good, I'll say. I mean, yes, there are some areas. I would say it's not broad-based yet for ADI. I say yet. If demand continues at this pace that it has been, I think you're going to see it. I mean it happens in every supply -- I mean, every semi upswing. Supply is limited. Right now, we're good. I mean we gave our outlook 2 weeks ago. We didn't talk about supply constraints constraining our demand for the first quarter. So I think we feel good about that. We've done a good job over the past 6 months, ensuring that we do have supply in the case of an upturn. So right now, we're good to go. I have seen those letters and comments from other of our peers out there. And so I think it's just different markets, different ways companies do business.

What about with regard to pricing? And again, with your business being skewed to the high end, you don't typically see the same price swings as some of the lower-margin analog. But there are some changes. And one of the things, for example, as you go into the new year, there's usually annual price negotiations with the automakers. Maybe you could speak to some of that in the current environment. Is there anything you'd consider to be abnormal there?

Nothing abnormal there, I'll call that, on the price negotiation side. So NXP is raising prices. I think they said -- I mean, it's public. They said they're raising prices. It's something we always look to do, but it's not abnormal in a year. We'll always look at areas where we think we can increase price. This is an ongoing practice at ADI, just to understand the market dynamics, where are we adding more value that -- and those values should accrue to us, not to the customers or the suppliers, et cetera. So right now, it's business as usual. As things get tight, we do specifically look at areas to target. We could potentially increase prices. We haven't done it yet, but it's something we could have as our option to do.

Okay. Maybe we'll pivot a little bit and talk about something that's also important, which is the Maxim acquisition. I know that you're limited in what you can say, and I'm not expecting you to say anything new. But really, if there is something new, I'd be interested to hear it, of course. But the -- in terms of the rationale for the deal, and Maxim has been around a while. You made decisions to acquire Linear, which I would consider to be Maxim's closest peer a number of years ago. So maybe the base question is why Maxim, why now?

Yes. I would say, why not Maxim, right? And I mean, I said tongue in cheek a little bit, but if you look at what ADI has done over the past 5 years, it's acquired high-quality assets to really build our analog portfolio. And Maxim is almost the next natural step in building out that portfolio. We did Hittite 5 years ago. We did Linear a few years ago. Now we did Maxim. So really, we rounded out the analog portfolio. We have 10 -- after Maxim, we'll have 10,000 analog engineers, which is one of, if not the highest amount of analog engineers in the industry. And that's a big thing. I mean analog engineering talent is scarce. And the reason it's scarce out there, but really trying to acquire that talent and attract the new talent was also key, right? I mean you have less kids coming out of school each year in analogs. You want to become the destination for those kids, and Maxim is part of that. Also, why now? It's funny. When we did Maxim, I think we surprised the whole industry. Oh my gosh, someone did a deal during COVID. How did they do that? Now we've seen 3 or 4 deals since then. So I think, obviously, I don't know we would -- dominant theory, we started it, and everyone kind of followed suit. Obviously, they're working on it, too. But it just made logical sense. I mean because how can you do a deal during COVID? It actually is a little bit easier. Why? There's no travel. It's all Zoom meetings. And it's also -- it's easier, things like that, that are very secretive. No one's leaving rooms traveling here and there, no one really knows. So it's actually much more efficient in a COVID world to do a deal. It's Zoom, private rooms, you get stuff done. And I think it helped a lot that we knew Maxim very well. I mean they're a competitor. We've known them for decades. So we knew what they're about, which helped really make the deal move fast. What did Maxim add to us? It's not just engineers. They added a whole another portfolio of analog capabilities. One, they double our power business. Power is the fastest-growing market in semis. That's fantastic. We have more power management. Two, from an application side, they're strong -- probably the strongest company in analog and automotive. To be candid, ADI has been a bit weaker now over the past 5 years. So that addition really helps round out our B2B portfolio. When investors think of ADI, they always think industrial is strong, comm is strong, auto's a little weaker. Well, industrial and comm will still be strong. And now you add an element of automotive -- strong automotive growth to that, that's fantastic. And even in comms, Maxim doesn't do wireless really. They do mostly wireline and powerful processors and servers. So we really round out our comms business as well. And lastly, I'll say, people say, "Oh, you bought Linear. Why do you need Maxim? They're the same company." They're not. They both go to market very differently. Linear is fantastic at the general purpose portfolio. They have thousands of SKUs, stripped the broad market. We're bringing them to more vertical applications, but that's what their core kind of thesis is and how they run their business. It's a really broad market. Maxim, on the flip side, has struggled to compete with the likes of ADI or Linear and TI in that broad market. They've really focused their R&D more on the application-specific side or vertical market side, like automotive, like you've seen and comms and health care. So you put that together, they're 2 different companies. They actually both have similar technologies, but they go to market very differently. End of the day, we're an $8 billion analog company with 70% gross margins, 40% op margins, and our goal is to continue to grow that business and an $8 billion revenue and at least a 5% CAGR.

Right. And one of the differences between the Linear acquisition and the Maxim acquisition is the Maxim acquisition is a stock deal, which, at the time, you said the rationale on that was because of the COVID uncertainty, which sort of mitigated some of that uncertainty what was happening in the marketplace. It also limits some of the accretion on that as well relative to where the linear deal is. So maybe you could talk about how. And right now, you get some [ moderate ] accretion in the expectations for that. Are there avenues to make that better over time? And what would drive that, if that were the case?

Yes. You're right. I mean I think it limits the near-term accretion, I'll call it, the 2-year accretion. I think if you look out beyond 2 years, I think it's going to be a very accretive deal. And there are more things that we have in our control that -- to make it more accretive even faster, if you so choose. I mean, one, on the cost side, we announced $275 million of synergies. I'll call that a starting point. We're also looking at other areas, much like we do with Linear, where can we optimize our manufacturing. So I think $225 million is a starting point, additional cost synergies in the years 3 and 4, very much like Linear. Two, we use all stock. Like you said, we hooked our stock prices together given the uncertainty of the world. We don't know if stocks would go down 30%, up 30%, end up being up 30% so far. Took out that risk. Also using stock, it really -- it took all of their stock-based comp for all their employees and turned to ADI stocks. So you instantly have retention right that way. So we got there. We got the stock, closed the deal, what happens? We have a super low leverage ratio. Our leverage ratio, ideal close will be below 1. We'll likely have over $3 billion of cash. How we have so much cash? Well, Maxim is not paying a dividend, not buying back shares over the next year. So all that cash accrues our balance sheet, plus what they have, plus what ADI has, we don't need $3.5 billion of cash. We'll take that cash quite quickly and return it to our shareholders in an accretive manner. That will help. And now that we have a lower leverage ratio, there's no need to pay down our debt going forward. We said last earnings call, we don't need to pay down debt. When debt comes due -- our next one is December '21. When it comes due, we will roll it forward. Rates are low. We have a low leverage ratio. We don't need it. So 100% of our free cash flow now goes to either buybacks or dividends, at least 100%, I'll say. And with a high cash balance, it will be over 100% for a certain period of time. So net-net, to your question, Chris, you'll see our share count come down pretty quickly post deal and help on the accretion side of the equation in the more near term. And then you also had the cost synergies. I didn't mention the revenue, like once that we did hit that, we'll double hit that revenue easily. It took 5, 6 years. Linear, we're progressing to that point. It will be 4 years post deal close in March. We're starting to get those revenue synergies today. They're coming to market today, and they're starting to ramp, double the growth rate. Maxim, we think we can grow them faster. They've grown -- they're flat over the past 10 years. A lot of that was consumer. You take out consumer, they've been growing kind of 3%. I think we can grow that business faster as a combined company. Again, as you grow that top line faster and get more leverage in the model, it'll help accretion.

Right. Now -- and I mean, what it sounds like in terms of your intention there is more about keeping the existing debt that you have now and not repaying it. The other option is to increase your leverage somewhat more, and that would drive some more -- you could use that to buy back stock. Is that part of the playbook as well or potentially part of the playbook, actually new debt as a result of this deal?

I would say it's an option. Like you're right. Using all stock, it gives us a lot of options to deal close. Could we do what you said? Sure. We could usually, I want to call it, synthetically buy the company for debt in a way, right? You had deal close, raise debt and repurchase the shares. Net-net, it's an all-stock deal unannounced. Comco is not an all-stock deal. That's definitely an option. But I think we'll wait and see how things play out over the next 6 -- 6, 9 months when the deal closes. And then we like kind of having that as our option as well.

Right. Well, that's fair. Maybe I can go back and as -- it will be helpful to look at the history of Linear deal and see what potentially could come with Maxim. And I know aside from the role, the fact that Linear deal was a cash deal that there was some revenue -- there were some cost synergies, you also just focus on revenue synergies. That was basically operating the Linear business differently than Linear management. Maybe you could talk about that, and now that it's been a couple of years later, how that's kind of played out. And to what extent you actually think you've grown the pie for Linear over that period by operating it differently?

Yes, you're right. Linear is very -- I mean, Linear is a great company. They had very strict rules about how they came into market, what margins they would approve. And as a result, they had very high gross margins, 75%, and good operating margins. I mean -- but also constrict their growth. We've loosened the shackles. I wouldn't say we're just cutting prices, and that's why we're doing what we're doing and growing the business. We've just said, go after different businesses, figure out ways to get design wins. We'll cost reduce it over time as we always do at ADI. Same time, your cost structure is a little lower today. I mean as a bare company, we use more -- we outsource more to the back end test and assembly. You get better pricing that way. So you could actually save cost there, lower price, net margins don't change. So a lot of different things we're doing on that angle. And you actually -- Linear margins are probably better today than they were when we closed the deal because of the synergies, both on kind of operational synergies and cost synergies that we've gotten as we've gone through the business. You're right. Our goal is to double the revenue growth rate over kind of a 5-, 6-year time period. And I think if you go back a couple of quarters ago, we talked about, we had $500 million of lifetime revenue from Linear coming to market on the next year. Those are design wins that Linear would not have gone. It's either a new customer or a new application. And $500 million is a lifetime revenue. So how to think about that like an annual basis? Well, let's say each Linear product lasts 10 years, make it easy. That's $50 million of incremental revenue that Linear would not have gotten as a stand-alone company. It doesn't sound like a lot. But on a $1.6 billion enterprise when we bought them, that's like 3% or 4% growth on top of what they were growing. So that's just 1 year. So they were growing 3 or 4, we added another $50 million. We basically double the growth rate right there. And that's just 1 year of product coming to market. In '21, we have another profit products coming to market. You get the compounding effect of those new products coming to market. So it's been very successful. Both, we got the synergies we thought. We have about $50 million more on the cost side as we close a front back end facility in the back half of this year. And the revenues coming to market today is going to drive some more revenue growth for the combined company as well.

And do you think there's similar opportunities with Maxim? Because it was -- they're not -- they weren't the same company. Maxim didn't operate on the same parameters as Linear. How does that apply to Maxim?

Yes. I think there will be, for sure. I think a lot of it also is, Maxim said, like it's tough to be with ADI. You have anchor products. You're a leader in RF. You're a leader in converters. It's hard for us to compete in those markets. So once we have more build -- more components to sell, it's easy to pull them through. They also have different applications. They can pull us through, too. So I think it will happen. I think once you get the deal approved, we'll likely come out with more kind of tangible evidence, just like what we did with Linear. We announced the deal, we closed the deal one March, we had an Analyst Day in I think in June or July time frame, and we talked a little bit more granular on where we saw those opportunities. It will be as cookie-cutter as Linear. Linear had very strict rules. Minimum ASP, minimum gross margin. Maxim doesn't have that. But I think we'll want to tell the story of where can we bring each other in, to either new customers, new markets, new applications. I think that is the power of the combination.

Right. What about with regarding the distribution strategy and different companies between Linear, organic ADI and Maxim? You have very different strategies with regard to distributors. In fact, Maxim themselves, I'd probably argue they were more distributor-friendly, I would say, or more dependent on distributors than yourselves. How might that change going forward? And is that relevant for margins or revenue growth?

Yes. I mean I think it was -- you're right. We are -- we look at -- we use distributors. Arrow's our global partner out there for this distribution. They're a great partner. We drive great growth through disti channel, great margins as well. Having Maxim allows us to sell more through distribution. It makes us bigger. And whenever you get bigger, you get -- the more you can sell. And it would definitely be an area we'll look at to see what do we do as a combined entity. How can we utilize the distribution channel to our advantage?

Right. Okay. Maybe just checking for questions, and I don't see any new ones here. Just maybe talk about the comm market a little bit. And I consider ADI pretty much a proxy for what's happening in 5G now on comm because of the design breadth that you've got right now. You did talk about that pausing a little bit, as we've heard from some others. How does that proceed as you go through next year with some of the 5G deployments that are expected in 2021?

Yes. It's a good question. It depends. Like I said, I think you led off well. We're kind of a proxy for 5G. If 5G is not deploying, it's hard to grow. And I think if we look at it in '21, we think it's -- it'll be tough in a way. We're not really sure what's going to happen in China. I don't think China is sure what's going to happen in China, meaning, what happens with Huawei, what happens to the Huawei share, when do they deploy, how much they deploy, what channels? There's a lot of uncertainty in the market there. Don't do it. There'll be 5G in China, for sure, in '21. I don't know if it would be calendar 1Q, calendar 2Q, calendar 3Q today. So I think we've taken the conservative approach saying, when 5G deploys, we'll be right there, and we'll grow with it. We're just not sure of the timing of those deployments because our customers aren't sure. Now that's China. Look at the rest of the world, same thing, we're not sure on the timing, but Korea was a big 5G deployed in '19. They didn't do much at all in '20. Look at '21, the -- there'll be another round in Korea in '21, again, unsure the timing of that, but they're lined up to deploy. Japan is supposed to deploy around Olympics. Olympics never happened. They'll move to '21 as well. And probably the biggest geo, I'll call it, biggest geo non-China would be North America. North America has been deploying some here in the back half of the year, but what they're looking to do is they have the C-band auction later this month. Once they deploy that spectrum, carriers will buy it, and you'll see a lot more deployments on that sub-6 gigahertz spectrum for 5G, and that will begin late kind of '21 and a lot more so in '22 and '23. So what you're seeing is 5G really broadened out globally. You'll see a lot more global 5G base stations at '21 than '20, but China is still the biggest market for 5G. So there's a lot of hesitancy out there, and just say, when does that turn back on?

Right, right. And I guess, the question here is what happens with Huawei and that -- obviously, you're not supplying to Huawei, as no one is right now. And with them out of the market, what happens to everyone else? Is China comfortable building out a network without Huawei or [ waiting for when the time is right ]?

Yes. Rest of world -- I mean, there's been no decisions made in China and the rest of the world. We're seeing some more like in Europe say, we're not going to use Huawei anymore. Well, if they don't use Huawei, it's a net positive for us right now because of the restrictions, like you said. Because of the restrictions, if a carrier chooses someone not named Huawei, it's a net positive for us. We have better share and better content there. In China, unsure what they're going to do. And if the share goes to someone else, that's great for us. If it stays at Huawei, hopefully, they're still deploying 5G. I mean, for us, what we want to see is 5G deployed instead of being delayed. So we'll see what happens. I think it will become clear. As the calendar flip to '21, I think it will become clear. My gut is, I mean, China likes being -- I mean, they have the 5G crown today. I don't think they want to give that up to the U.S. And the U.S. is moving fast in 5G next year. So it would be interesting to see as the year progresses what happens there.

What about the wired part of comm? And all of our investor focus has been the wireless part 1, but wired part's still pretty important to you, and there's a lot of growth there. Can you maybe talk about that?

Yes, it's a great point. I get every 10 questions, 9 are wireless and 1 on wired. Wired is a great little business. I mean it's not as volatile. I guess build-out of carrier networks and networking boxes is not as sexy as 5G, doesn't have an acronym like that. But you're right, wired for us is about 1/3 of our comms business. It's got some really nice growth last year. As you saw, more people work from home. You saw the carriers and enterprise companies upgrade their networks and data centers, too. Where does ADI play? ADI plays, really -- the medium to long haul. So from the base station to the data center or the enterprise network as a service provider, that's where we play. We don't do much intra data center. So we're not as growthy as some of our peers. We're more consistent growth. It probably grows 5% to 10% kind of over the long term. And really, as you think about that long haul, both data center to data center and kind of base station to data center.

Right. I mean when I put all that together in comm, and it's important because of the volatility there because there's such a range of options. And my own view, though, is I saw Street estimates maybe 3 months ago, and particularly because of taking out Huawei for 2021, and it was in 2020. The Street might have been miscalibrated there. But in total, do you think that -- I mean, is still growth for calendar '21 on the table for you guys? Or is that -- I think we have it kind of flattish in calendar '21 and more growth in calendar '22. Is that more reasonable or...

Yes. Yes, I would say, if you can tell me the 5G deployments for next year, I can tell you if they'll grow or not, how about that? The -- I said tongue in cheek really, but I think yes -- could we grow? Sure we could grow. It could also unsure, both in China and also North America. I mean fiscal fourth quarter for us ends in October. If North America happens in the calendar fourth quarter in November and December, that's really more fiscal '22 for us. So it's a lot of timing based. But I think you think about it right, Chris. '21, you have Huawei goes away to 0. That's 2% to 3% of total sales or 10% to 15% of comps. That's a big hurdle. Fast forward to 2022, a lot less noise out there, and there's no reason that, that business should not have a very good growth year in 2022. '21 would be noisy, I think, and timing-wise, and as the market revamps after COVID, but '22, more 5G deployed globally. And I think China as well will have a lot more certainty around those deployments.

Right. A good question -- an investor question and -- was around out the comm stuff, and -- it's about O-RAN. And what's the impact if -- and I know O-RAN, it's not really significant right now. But if it does have more significance, what does that mean for ADI?

Yes. Good question. O-RAN is great for the market in a way. It could help deploy 5G faster more globally and also enable new applications. And I don't think -- there's not -- there'll be some O-RAN deployments. We saw one where -- in the Rakuten network, part of that one. It'll be small over the next couple of years. I think if and when O-RAN takes off, it will probably be years 3 plus. O-RAN is great for us because what it is, is really -- it's almost like, if you remember, open compute early days, they commoditize the boxes, and really, it's about the technology and getting to market faster and being able to open source and self upgrade these boxes faster. They try to be on the wireless side. So you get new customers there, and there's more importance on the technology going in the boxes. So more of what we supply becomes more important. So I think there's more content opportunity to be had in O-RAN and more customers and more applications for it. So I think that we're focused on it, but really think about it as 5G is going to happen. O-RAN is kind of an additional growth driver to 5G over the long term. And what that means is typical G cycles last, what, 2 to 4 years maybe, 5G will be longer than that to begin with. Then if you add an O-RAN on top of that, there's chances to be 5 to 10 years because you get new applications adopting 5G, like industrial automation, for example.

Okay. We got about 10 minutes left. So if there's other questions, please send them in. But I'll make the pivot to auto. And in some of your comments earlier, you're talking about auto has been -- the auto growth has been less than some of the peers over the last couple of years. And I think that's largely been as your -- you have some legacy businesses in safety and in radar that have been falling off. So maybe your first question is, how long do we still have that -- those legacy business roll off and our headwinds? And so then uncover some of the better things that are going on in the auto market.

Yes, good question. They're still there, unfortunately. I mean you still have about $100 million to, call it, legacy business. The good news is every year, it gets smaller as a percent of auto. And I think, actually, in '20, it dropped a lot because of production, and it didn't come back as fast as ourselves. So we actually -- a lot of the -- more than the decks got cleared in '20 than we thought going into the year, the legacy stuff. Now that, call it, $100 million is flat to down over the next few years. We don't see any big drop off there. But to your point, Chris, when you have an anchor like that, $100 million on an $800 million business, it's hard to grow as fast as some of the peers because it's not growing, and it's declining. But if you look at, for us, look at '21, that's a lot smaller than it was. And it will get smaller again. I think if you look at '22, we have new products coming to market on the EV side. We talked about wireless BMS. We talk about GM in the wireless BMS arena. We have power wins. We have new A2B wins coming to market that we already have. I think '21 is probably a year kind of in line with unit growth. And you look at '22, I think we can outgrow units. One, we have new products going to market; and two, the legacy stuff is so small that it won't be as impactful.

Right. Okay. And if I took that out, so you're talking like '21 in line with unit growth. What does that mean? And I guess, I'm not smart enough to do math on the fly. But obviously, the nonlegacy part of it is growing faster. Do you think that's -- excluding the legacy business, that you're growing in line with semiconductor market in automotive or...

Yes. I'll say in line, but it depends who you pick for your peer group. But yes, I think what we target to do is grow that business at units plus probably 3% to 5%, call it. And 3% to 5% is the content on top of just general semiconductors into the vehicle. And the 3 main area for us, we have a great presence in EVs. So as you see more and more EV is being deployed -- not being employed, being brought to market, consumers preferring EVs, that's a great business proposition for us. We are the market leader in BMS for EVs. On A2B, I mean, no one thinks infotainment is a growth market. I'll tell you right now, for ADI, it is. If you look at last year, A2B, now it's small, it's low single digits of auto. It grew 70%, 7-0% last year in a down market. Why? We have a bunch of design wins there across almost all OEMS. It's over 20 OEMs globally. That we have the wins that are coming to market. Each year, more and more cars, more and more OEMs, and it's just starting. So there's growth there for the next kind of 3, 4 years from an infotainment standpoint. Those are really good margins as well. And power, we talked earlier about Linear and synergies. Well, auto is one market that we peaked our portfolio and brought to market some new products last year. So you start seeing those really ramp for revenue in '22 and '23. So that's what gives me the confidence that we start seeing better growth, ADI -- call it, ADI proper. We'll have Maxim by then, but ADI proper, in the years '22 and '23 than we have seen for the past 5 years. New wins and the bad stuff's smaller.

Right. And what do you think about that Maxim part? Because auto -- and I'd say, it's probably the best part of the -- most attractive part of the Maxim business right now. From what you guys see, and you've obviously done a lot of due diligence, do you think that Maxim auto business is poised for better growth in that, better than the 3 -- SAR plus 3% to 5%?

Yes. I mean they've been growing 10% plus for the past 3 years. There's no reason why they can't continue that. There -- I mean, what they're very good at, their serial link or kind of high-speed linked technology for cars. We're super strong in A2B for infotainment audio, varies really strong on the video side for high speed. And they're almost de facto kind of the name there. Just think of many cars that has cameras or radars or connectivity around that, Maxim's used there. So as more cars get more cameras, get more radars, you need more of their technology. So yes, they have a great pipeline there, and we're excited to add that to our portfolio. Then the question is, how can -- is there a way to merge those 2 portfolios? You have low-latency audio. You have high-speed video. Is there a way to merge these, making it more valuable to the customer? Time will tell. We have smart engineers, so I'm sure they'll figure out something.

Okay. That's good. Maybe just kind of rounding out the portfolio in industrial. It's harder for us that -- to ask questions and harder for you to talk about it because there's so many different things. But what I'll point out is factory automation. And factory automation in the last cycle was kind of first to show signs that it was slowing down and then the first to show signs that it was coming up again. And I think you did mention that, that was one of the areas you were seeing some improvement coming out of the summer.

Yes. You're right. So you're right. Factory automation was super strong a few years ago, right? I mean not coincidental, around the time, all the tariffs starting coming in play in the summer of '18 -- I think it was summer '18 now, we started seeing a weakening in that business. And it's been weak -- it's been down year-over-year each of the last 8 quarters, up until 4Q. So 4Q was our first quarter of annual growth. If you look over that time period from the peak in 2Q '18 to the trough, that factory automation piece was down almost 40% from peak to trough. And factory automation for ADI is about 20% of our industrial markets. So yes, it's been a drag in our industrial growth. And as you look forward, I think most would agree, there's more growth drivers for automation going forward than there have been in the 5 years prior. Why? After COVID, everyone kind of realized supply chains aren't as strong as they thought or was robust. You're seeing people and customers trying to figure out how to make their supplies more connected, do they localize them, how can you make it more configurable? All that means more content and new factories. So I think as you look forward, there's no reason to think that we are in the start of a new upswing in automation, and we can't hit a new peak in the next kind of 2 to 3 years. It will take time because of industrial, but it will -- I think we get there again, but give it 2 or 3 years.

Okay. And finally, we will talk about margins a bit. And that's kind of a segue off of the industrial because I know your internal utilization is generally driven by what's going on in the industrial market. How do we think about your margins over the next 2 years? I mean, again, they showed some improvement in the last quarter with some things coming back. But how much improvement can we really drive? And what's the source of that improvement?

Yes. I think -- I mean, our long-term target is 70%-plus gross margins. We don't strive for 75%. Could we get 75%? We could, but you'd lose some stuff on the side. You'll lose revenue growth and operating leverage and operating margin, so it doesn't make sense. I think if you look at ADI, through the cycle, we operate between 68% and 72% over the past kind of few years. I think that's the kind of range you'll see as you go through the next cycle as well. Like I said, you're right, industrial is the highest margin business for us. We also do a bunch of that internally. So as industrial gets stronger, as your utilization get better, it helps margins. And secondly, we also have about $50 million left on the Linear side for cost synergies as we closed the front-end fab and back-end facility of theirs late '21.

Okay. And finally, what about on the operating margin side? And like others, you are kind of layering in some additional cost as things normalize. Maybe you could talk about that and then kind of longer term, how that drives either your gross margins or in a certain band, can you get a little more leverage on the operating margin side as revenue tends to grow?

Yes, you're right. We had a big uptick in our first quarter. I think it surprised a lot of people, but it's actually -- it's a sign of something good. I mean we wouldn't have reinstated merit and put things back in place if we didn't think '21 will be a good year. Business came back. We reinstated merit in September, used that in March. So we reinstated that March 1 into September, and we also put our buyback back in place as well. So kind of we've paid employees, and we're also paying our investors at the same time. We pulled them the same time, too. And as you look to next year, 1Q sets up big because of variable comp and the merit. It probably goes up a little bit again in 2Q on this normal increase is there, you have more working days without the holidays. But then after that, I think if you go to the back half of the year and going forward, if we can consistently grow this business kind of, call it, 5%, 10%, there's no reason OpEx needs to increase at that level. It will be half that, or maybe a little, call it, 50% to 70% of that over time. So keep margins flat, call it, gross margins, and over time, you get leverage on the OpEx line. And part of that reason is we've been investing heavily over the past 5 years for these things that are coming to market now. And as those things come to market, it drives growth and you get leverage on those investments.

That's great. I'm looking at the clock. I think we're unfortunately out of time, but you, as usual, have used the time we have to give us a tremendous amount of information. So we appreciate it.

Any time. Appreciate it. Have a good holidays to you, Chris, and everyone on the phone.

All right. Well, thanks a lot. Thanks for attending, Mike, and thanks, everyone else.

Sure. Bye.

Have a good one.