Analog Devices’ (ADI) fiscal third quarter
earnings were in line with the Zacks Consensus Estimate. However,
revenue fell short of expectations.
Revenue
Analog Devices generated revenue of $683.0 million, which was up
1.2% sequentially but down 9.9% year over year and just within
management’s revenue guidance range of $682 million to $702 million
(a 1% -4 % sequential increase).
Revenue by End Market
The industrial market generated 47% of Analog
Devices’ total revenue (down 0.4% sequentially and 11.4% year over
year). This is a very diversified market for Analog Devices,
including the industrial automation, instrumentation, energy,
defense and healthcare segments. Demand from distribution was
relatively steady right through the quarter, with order patterns
strengthening slightly toward the end. Analog’s customers do not
expect further deterioration in their businesses.
Communications generated 20% of total revenue,
up 9.2% sequentially but down 9.0% year over year. Analog’s
communications business now constitutes infrastructure sales alone.
Management attributed the sequential increase to strength at
wireless customers driven by baseband deployment in the U.S., Japan
and other Asian countries. Analog Devices has offerings for both
the traditional and 4G networks, so it stands to gain when there is
any increase in demand. Additionally, it has higher content in the
4G segment, which, along with its position at leading OEMs, should
remain a positive factor influencing revenue growth.
The automotive segment generated around 17% of
Analog Devices’ second quarter revenue, down 2.8% sequentially and
up 13.0% from the year-ago quarter. Sluggish demand in Europe
impacted results in the last quarter. However, an increase in
vehicle sales, growing electronic content in vehicles and growing
dollar content per vehicle remain longer-term positives.
Consumer, which includes the computing (1% of
fiscal 2011 revenue) and handset (3% of fiscal 2011 revenue)
businesses, generated 16% of revenue, up 0.8% sequentially and down
23.2% from a year ago. The weak point here was digital cameras,
with growth in portable media supported by other segments (home
entertainment and computing), which came in flat. The positive was
strong order growth, which grew the backlog and resulted in a book
to bill ratio of over 1.
Revenue by Product Line
The year-over-year decline in revenue was broad-based across
product lines. The "Other" analog category was the only one posting
any substantial increase.
Analog signal processing products (85% of total revenue) were up
1.5% sequentially and down 10.4% year over year. Converters were
rather flat sequentially while declining 11.2% year over year.
Amplifiers, on the other hand, grew slightly (1.8%) on a sequential
basis, while declining 8.4% from last year. Other analog products
jumped 8.2% from the previous quarter, but remained 7.9% below the
year-ago level. The three product lines generated 44%, 27% and 14%
of quarterly revenue, respectively.
Power management and reference products remained at roughly 7%
of revenue, down 1.4% and 17.3% from the previous and year-ago
quarters, respectively. These products are generally sold in the
consumer market. Management has refocused the business over the
last few years to concentrate on this fast-growing product
line.
DSPs (9% of total revenue) were down 2.6% sequentially and 4.4%
year over year.
Margins
Analog Devices generated a pro forma gross margin of 65.6%, up
33 basis points (bps) sequentially, down 167 bps year over year and
short of management’s guidance of a 50 bp sequential increase. The
sequential improvement was on account of slightly better
utilization rates. The decline from the year-ago quarter was mainly
on account of significantly lower volumes. Mix was relatively
neutral to both the sequential and year-over-year comparisons.
Operating expenses of $235.4 million were up 3.5% sequentially
and 2.0% from the July quarter of 2011. Special charges related to
restructuring activity were $5.8 million in the last quarter, which
was the main reason for the operating margin shrinking 43 bps
sequentially and 568 bps year over year to 31.1%.
Net Profit
The pro forma net income was $169.8 million, or a 24.9% net
income margin compared to $162.9 million or 24.1% in the previous
quarter and $219.9 million or a 29.0% in the year-ago quarter. The
fully diluted pro forma earnings per share were 56 cents, compared
to 53 cents in the previous quarter and 71 cents in the July
quarter of last year.
Since there were no one-time items in any of the quarters, the
GAAP and non GAAP net income and EPS were the same.
Balance Sheet
Inventories increased 2.7% to $345.8 million, with annualized
inventory turns dropping sequentially from 3.1X to 3.0X. Days sales
outstanding (DSOs) inched up to 46. Cash generated from operations
was around $137.7 million. Analog Devices spent $39.2 million on
capex, $89.5 million on cash dividends and $17.3 million on share
repurchases in the last quarter.
Guidance
Management expects fourth quarter revenue of $685 million
to $715 million (a 0-5% sequential increase) with the gross margin
of 65%, operating expenses of around $231 million and diluted EPS
of 54 cents to 60 cents. Analysts polled by Zacks expected earnings
of 60 cents per share when Analog Devices reported, at the high end
of the guided range.
Our Take
Given improving order trends toward the end of the quarter and
historic low lead times, Analog Devices expects most end markets to
turn around in the current quarter. Channel inventories also appear
lean, meaning that the company is shipping to consumption.
Despite the positive commentary, guidance was again below our
expectations likely reflecting conservatism. Particularly so, since
Analog’s end markets appear to be looking up. Nevertheless,
we expect some fine-tuning of estimates, which should keep the
company a Zacks #3 Rank (Hold rating over the next 1-3 months).
We note that other analog peers, such as Linear
Technology Corp (LLTC) and Maxim
Integrated Products (MXIM) are also ranked #3 (short-term
Hold).
ANALOG DEVICES (ADI): Free Stock Analysis Report
LINEAR TEC CORP (LLTC): Free Stock Analysis Report
MAXIM INTG PDTS (MXIM): Free Stock Analysis Report
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