Analog Devices’ Guidance Disappoints (ADI) (LLTC) (MXIM)

Zacks

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

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