Analog Devices Inc. (ADI) reported third quarter 2013 earnings of 57 cents per share, exceeding the Zacks Consensus Estimate of 54 cents. The increase was driven by strong revenue growth coupled with better gross margins and solid expense management.
Adjusted earnings per share exclude one-time items but include stock-based compensation expense.
Revenues
Analog Devices generated revenues of $674.2 million, up 2.3% sequentially but down 1.3% year over year. The revenues were at the higher end of management’s guidance of $655 million to $685 million, driven by the strength in communications and industrial segments.
Total end customer orders, which include both original equipment manufacturer (OEM) and distribution, were up sequentially. Also, the book-to-bill ratio was one.
Revenues by End Market
The industrial market generated 47% of Analog Devices’ total revenue (up 1.0% sequentially but down 3.0% year over year). This is a diversified market for Analog Devices, including the industrial automation, instrumentation, energy, defense and healthcare segments.
Management expects the industrial end market to register strong growth in the fourth quarter as order rates have improved but inventory levels remain low.
Communications generated 21% of total revenue, up 12.0% sequentially and 1% year over year. The improvement came from the wireless infrastructure sub-segment as China launched the last phase of its 3G TDS CDMA network build out which led carriers in the U.S. to move toward densification of the 4G LTE networks. Analog Devices has offerings for both traditional and 4G networks and therefore stands to gain from demand ramp. Operators in China and the U.S. have declared their intent to increase 4G LTE deployments in 2014. 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 18% of Analog Devices’ third quarter revenues, down 2.0% sequentially but up 5.0% from the year-ago quarter. Though the company did not perform well in the last quarter, management believes that growth in worldwide luxury vehicle will lead to solid automotive revenues in the near term. The growing electronic content in vehicles will remain a positive, with demand for products like driver assistance and powertrain efficiency systems remaining strong.
The Consumer segment, which Analog Devices clubbed with the computing and handset businesses, was down 1.0% sequentially and 6% year over year. It accounted for 15% of total third quarter revenue.
Revenues by Product Line
On a sequential basis, revenues increased across all product lines, except in the other analog products, which were flat sequentially. On the contrary, revenues decreased across all product lines on a year-over-year basis, except in converters.
Analog signal processing products (85% of total revenue) were up 2.0% sequentially but down 1.0% year over year. Converters were up 1.0% sequentially and 2.0% year over year. Amplifier revenues increased 4.0% sequentially but declined 5.0% year over year. Other analog products were flat sequentially but down 6.0% from year-ago quarters.
Power management and reference products remained at roughly 7% of revenues, up 5.0% sequentially but flat compared with the year-ago quarter. These products are generally sold in the consumer/computing markets. Management has refocused the business over the last few years to concentrate on this fast-growing product line.
Digital Signal Processing (DSPs) (9% of total revenue) was up 2.0% sequentially but down 1.0% from the year-ago level.
Margins
Reported gross margin for the quarter was 64.5%, up 50 basis points (bps) sequentially but down 110 bps year over year. The primary reason for the sequential increase in gross margin was attributable to higher factory utilization and lower manufacturing costs.
Analog reported operating expenses of $226.7 million, down 3.7% from $235.4 million incurred in the year-ago quarter. Research and development expense increased as a percentage of sales, while selling, general and administrative costs decreased from the year-ago quarter. The net result was a GAAP operating margin of 30.9% compared with 31.1% in the year-ago quarter.
Net Profit
On a GAAP basis, Analog Devices recorded a net profit of $176.2 million or 56 cents per share compared with $169.8 million or 56 cents per share in the year-ago quarter.
The company generated adjusted net profit of $179.7 million compared with $198.0 million in the year-ago quarter. Pro forma earnings per share came in at 57 cents compared with 56 cents in the last quarter.
Balance Sheet
Analog Devices exited the third quarter with cash and short-term investments of approximately $4.45 billion, up from $4.17 billion in the prior quarter. Trade receivables were $345.4 million, up from $333.9 million in the prior quarter.
Cash generated from operations was around $220 million. Analog Devices spent $30.1 million on capex and $104.9 million on cash dividends.
The company did not make any share repurchases in the last quarter.
During the quarter, the company declared a cash dividend of 34 cents per share to be paid on Sep 11, 2013, to all shareholders of record at the close of business on Aug 30, 2013.
Guidance
Management expects fourth-quarter revenues in the range of $675 million to $700 million, up 2.0% sequentially. The company estimates gross margin to be 65.0%, operating expenses to increase by approximately 1%, tax rate in the range of 14%-15% and earnings per share of 55 cents–61 cents.
Our Take
Analog Devices has a significant percentage of its revenues coming from the industrial and Communication markets, both of which are expected to see strong demand in the near term due to an improved demand environment. The increased 3G and 4G deployments in most regions and healthy order rates expected in the industrial market are quite encouraging.
Given these positives, it is not surprising that the revenue guidance was up sequentially. However, with continued uncertainty in key markets, the shares may remain range bound in the near term.
Currently, Analog Devices has a Zacks Rank #3 (Hold). Other stocks that are performing well at current levels include SanDisk (SNDK), Syntel Inc. (SYNT) and Silicom Ltd. (SILC). All these stocks carry a Zacks Rank #1 (Strong Buy).
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