Analog Devices Inc. (ADI) reported fourth-quarter fiscal 2014 earnings of 69 cents per share, exceeding the Zacks Consensus Estimate by a penny. Adjusted earnings per share exclude one-time items but include stock-based compensation expenses.
Revenues
Analog Devices generated revenues of $814.2 million, up 11.9% sequentially and 20.1% year over year. Revenues were at the higher end of the company’s guidance range of $790–$820 million and also beat the Zacks Consensus Estimate of $801.0 million.
Overall, total end customer orders, including original equipment manufacturer and distribution, were down sequentially. Also, the book-to-bill ratio was below 1.
Revenues by End Market
The Industrial market generated 45% of Analog Devices’ total revenue (up 6% sequentially and 19% year over year). This is a diversified market for the company, which includes the industrial automation, instrumentation, energy, defense and healthcare segments. The increase was driven by strong growth in all sub segments, including industrial automation, instrumentation, aerospace and energy sectors.
Communications generated 27% of total revenue, up 31% sequentially and 56% year over year, driven by strong wireless infrastructure sales. Continued 4G deployments drove higher sales in this end market.
Management expects wireless growth to continue in the next year as a result of increasing 4G LTE deployments in China and the U.S. The company’s technology in these wireless applications is focused on the radio signal chain, where spectrum is digitized and radio architectures lead to higher ADI content per system, driving demand for the company’s products.
The Automotive segment generated around 17% of Analog Devices’ fourth-quarter revenues, up 3% sequentially and 2% from the year-ago quarter, driven by continued strength in North American and Chinese vehicle markets, increasing content per vehicle and growth in worldwide premium vehicle sales.
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 up 14% sequentially but down 3% year over year. It accounted for 11% of the total revenue.
Margins
Reported gross margin was 59.7%, down 570 basis points (bps) sequentially and 590 bps year over year. The decrease in gross margin was attributable to unfavorable product mix.
Analog Devices reported operating expenses of $336.1 million, up 37.2% from $245.0 million incurred in the earlier-year quarter. Research & development expenses decreased as a percentage of sales from the comparable quarter last year, while selling, marketing and general & administrative expenses increased. The net result was a GAAP operating margin of 18.4%, down significantly from the year-ago quarter figure of 29.5%.
Net Profit
On a GAAP basis, Analog Devices recorded a net profit of $108.7 million or 34 cents per share compared with $201.6 million or 64 cents in the prior-year quarter.
The company generated adjusted net profit of $218.6 million compared with $196.7 million in the year-ago quarter. Pro-forma earnings came in at 69 cents per share as against 62 cents a year ago.
Balance Sheet
Analog Devices exited the fourth quarter with cash and short-term investments of approximately $2.87 billion, down from $4.93 billion in the prior quarter. The decrease was due to repayment of the short-term debt associated with the Hittite transaction. Trade receivables were $396.6 million, up from $394.8 million in the last quarter.
Long-term debt was approximately $872.8 million, slightly up from $872.7 million in the earlier quarter.
Cash generated from operations was around $262.3 million. Analog Devices spent $43.4 million on capex, $187.4 million on share repurchases and $116.3 million on cash dividends.
Analog Devices also declared a cash dividend of 37 cents per share to be paid on Dec 16, 2014 to shareholders of record at the close of business on Dec 5.
Guidance
Management expects first-quarter fiscal 2015 revenues in the range of $745–$775 million, up 21% year over year at the mid-point. The Zacks Consensus Estimate is pegged at $762 million. On a non-GAAP basis, the company estimates gross margin of approximately 65%, operating expenses of $263 million, interest and other expense of approximately $5 million, tax rate of 14.5% and earnings per share in the range of 58–64 cents. The Zacks Consensus Estimate is pegged at 62 cents.
On a GAAP basis, the company estimates gross margin of approximately 64.7%, operating expenses of $288 million, tax rate of 16.5% and earnings per share in the range of 50–56 cents.
Our Take
A significant percentage of Analog Devices’ revenues comes from the Industrial and Communication markets, both of which are witnessing strong demand. The increased 4G deployments in China and the U.S. will continue to improve growth in these markets, going forward.
The company saw weak order momentum in the reported quarter. However, management expects solid operating leverage beginning from second quarter on improving factory utilization and a favorable mix of business.
Additionally, the Hittite Microwave acquisition (closed in the third quarter) will continue to help Analog Devices offer high frequency chips and other signal processors. Hittite’s offerings will strengthen the company’s presence in the Industrial and Communication end markets.
However, the company’s high cost structure due to continuous investments and increasing competition in the analog market could be a matter of concern in the near future.
Stocks to Consider
Currently, Analog Devices has a Zacks Rank #3 (Hold). Some better-ranked stocks that are performing well at the current levels include Inphi Corporation (IPHI), M/A-Com Technology Solutions Holdings, Inc. (MTSI) and NVIDIA Corporation (NVDA). All these stocks have a Zacks Rank #2 (Buy).
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