Analog Devices Inc. (ADI) reported fourth-quarter 2013 earnings of 62 cents per share, which comfortably beat the Zacks Consensus Estimate of 58 cents. The earnings beat was driven by strong revenue growth in the automotive segment coupled with better gross margins.
Adjusted earnings per share exclude one-time items but include stock-based compensation expense.
Revenues
Analog Devices generated revenues of $678.1 million, up 0.6% sequentially but down 2.4% year over year. The revenues were at the lower end of management’s guidance of $675 million to $700.0 million. The sequential increase was driven by the strength in the automotive segment.
Total end customer orders, which include both original equipment manufacturer (OEM) and distribution, were down sequentially. Also, the book-to-bill ratio was below one.
Revenues by End Market
The industrial market generated 46% of Analog Devices’ total revenue (flat sequentially but up 2.0% year over year). This is a diversified market for Analog Devices, including the industrial automation, instrumentation, energy, defense and healthcare segments. The improved performance in the automation and process control business was offset by lower revenues from the instrumentation business, especially in smartphones, tablets and other devices with wireless connectivity. However, the defense and aerospace businesses recovered in the fourth quarter, growing by more than 10%.
Communications generated 21% of total revenue, flat sequentially but down 2% year over year. The modest sequential growth in the wireless infrastructure sub-segment driven by deployments in North America and Asia was partially offset by inventory reductions at some base-station customers, resulting in no sequential growwth.
Encouraged by the intention of the operators in China and the U.S. to increase their 4G LTE deployments in 2014, management expects growth to resume in the next year.
The automotive segment generated around 19% of Analog Devices’ fourth-quarter revenues, up 9.0% sequentially and 19.0% from the year-ago quarter. The increase was driven by strength across new infotainment platforms, safety and powertrain applications. Additionally, the ramp up of next generation safety platforms including advanced driver assistance systems (ADAS) radar saw higher adoption rates in the last quarter. In powertrain, stop-start battery monitoring technology gained traction in other higher-volume vehicles, increasing the the company’s potential growth.
Management continues to believe 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 6.0% sequentially and 31.0% year over year. It accounted for 14.0% of total fourth quarter revenues.
Revenues by Product Line
On a sequential basis, revenues increased across all product lines, except in amplifiers and power management & reference products. However, on a year-over-year basis, the decline in revenues was broad-based across product lines.
Analog signal processing products (91% of total revenue) were up 1.0% sequentially but down 3.0% year over year. Converters were up 2.0% sequentially but flat year over year. Amplifier revenues declined 1.0% sequentially but increased 1.0% year over year. Other analog products were flat sequentially but down 18.0% from the year-ago quarter.
Power management and reference products contributed roughly 7% of revenues, down 3% both sequentially as well as from 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 revenues) was up 1.0% sequentially and 6.0% from the year-ago level.
Margins
Reported gross margin for the quarter was 65.6%, up 110 basis points (bps) sequentially and 180 bps year over year. The primary reason for the increase in gross margin was attributable to higher factory utilization and lower manufacturing costs.
Analog reported operating expenses of $245.0 million, up 7.5% from $228.0 million incurred in the year-ago quarter. Both research & development and selling, marketing and general and administrative expenses increased as a percentage of sales from the year-ago quarter. The net result was a GAAP operating margin of 29.5%, down 150 bps from the year-ago quarter of 31.0%.
Net Profit
On a GAAP basis, Analog Devices recorded a net profit of $201.6 million or 64 cents per share compared with $179.2 million or 58 cents per share in the year-ago quarter.
The company generated adjusted net profit of $196.7 million compared with $178.6 million in the year-ago quarter. Pro forma earnings came in at 62 cents per share compared with 58 cents in the year-ago quarter.
Balance Sheet
AnalogDevices exited the fourth quarter with cash and short-term investments of approximately $4.68 billion, up from $4.45 billion in the prior quarter. Trade receivables were $325.1 million, down from $345.4 million in the prior quarter.
Cash generated from operations was around $282.2 million. Analog Devices spent $48.6 million on capex, $42.8 million on share repurchases and $105.9 million on cash dividends.
During the quarter, the company declared a cash dividend of 34 cents per share to be paid on Dec 17, 2013, to all shareholders of record at the close of business on Dec 6, 2013.
Guidance
Management expects first-quarter 2014 revenues to decrease in the range of -5% to -10% sequentially. The company estimates gross margin in the range of 64.0%–65%, operating expenses to decrease approximately within $3 million to $226 million, tax rate to be approximately 13% and earnings per share in the range of 44 cents–52 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 2014. The increased 3G and 4G deployments in China and the U.S will revive growth in these markets, going forward.
However, in the near term, management expects certain customer shutdowns and inventory reductions due to the upcoming holiday season. Given these negatives, it is not surprising that the revenue guidance was down sequentially. Also, with continued uncertainty in key markets, the shares may remain range-bound in the near term.
Currently, Analog Devices has a Zacks Rank #4 (Sell). Other stocks that are performing well at current levels include Inphi Corp. (IPHI), Microchip Technology (MCHP) and Supertex Inc. (SUPX). All these stocks carry a Zacks Rank #2 (Buy).
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