Analog Posts Solid Third Quarter

Analog Devices’ (ADI) fiscal third quarter results beat the Zacks Consensus estimate by 6 cents, or 8.3%. Revenue beat by 1.9%. Results exceeded management expectations on revenue, margins and earnings.

Shares were up 2.01% after hours in response to the news, although the earnings surprise was below the preceding four-quarter average of 17.9%.


Revenue of $720.3 million was up 7.8% sequentially, 46.4% year over year and better than management’s revenue guidance of $695-715 million (up 4-7% sequentially). The sequential strength was driven by the consumer and communications markets, although industrial also contributed. While growth was broad-based across all geographies, Asia was the strongest region in the last quarter.

Revenue by End-market

The industrial market generated 47% of total revenue (up 7.7% sequentially and 68.7% year over year), driven by broad-based strength across applications and particular strength in industrial automation and instrumentation. Energy efficiency requirements are an ongoing driver in this segment, resulting in increased spending. Asia/Pacific countries, particularly China was responsible for the growth in the last quarter.

The automotive segment (carved out of the industrial segment in the first quarter of fiscal 2010) generated around 12% of revenue, growing 0.1% sequentially and 62.2% from the year-ago quarter. The main drivers continue to be the global recovery, increasing electronic content per vehicle, especially in the areas of infotainment, safety and fuel efficiency. This, along with increasing demand for high-end vehicles that use ADI products are positives for the company. Management expressed optimism regarding the company’s ability to continue increasing the dollar content per vehicle and its own share in the market.

Communications generated 21% of total revenue, increasing 15.1% sequentially and 24.4% year over year. The wireline business saw sequential growth for the fifth straight quarter, although some of the increase was attributable to Chinese base station orders being pulled in from the fiscal second quarter. With mobile operators racing to meet increasing data needs and improving the efficiency of their networks, demand for networking applications is on the rise.

ADI’s converters, amplifiers and RF products are solidly positioned across all fast-growing geographies and should generate very substantial growth for the company. A much smaller, but nonetheless important section of the communications business is generated through smartphones. This segment also grew in the last quarter and management stated that ADI’s products were received well by customers.

Consumer generated 18% of revenue. Segment revenue was up 7.6% sequentially but 23.2% from a year ago, reflective of a higher level of business. Portable media products, digital cameras and other consumer electronics products drove the increase in the last quarter.

Computing accounted for the remaining 2% of revenue, down 10.2% sequentially and up 31.7% year over year. Management has taken a policy decision to avoid this market, since it is given to commoditization, making margin expansion difficult.

Revenue by Product Line

Both analog and DSP products witnessed strong double-digit growth from the year-ago quarter.

Analog signal processing products (84% of total revenue) were up 7.6% sequentially and 42.9% year over year. The sequential increase was fueled by converters and amplifiers, with the other analog category remaining roughly flat. Converters are the largest product line, with a revenue share of over 46%.

Power management and reference products generated 7% of revenue, up 14.9% sequentially and 90.9% year over year. The strength in this product line is the result of management refocusing the business over the past couple of years, as well as the ongoing recovery across all served markets.

Digital signal processing products (8% of total revenue) were up 4.1% sequentially and 52.1% year over year.


The pro forma gross margin was 66.7%, up 164 basis points (bps) sequentially, 1,256 bps year over year and better than management’s guidance of 65-66%. Gross margins have expanded in each of the last three quarters. The improvement in the last quarter was fueled by higher volumes that enabled better utilization rates, a more favorable mix of business and the reduction of expenses associated with the shutdown of the Cambridge manufacturing facility.

Operating expenses of $229.1 million increased 3.9% sequentially and 22.3% from the Jul quarter of 2009. However, the operating margin increased 283 bps sequentially to 34.9% compared to management’s expectations of 33-34%. While the higher gross margin was the primary reason for the increase, both R&D and SG&A expenses also contributed, declining as a percentage of sales.

The pro forma net income was $200.3 million, or a 27.8% net income margin compared to $167.3 million, or 25.0% in the previous quarter and $65.5 million, or a 13.3% net income margin in the prior-year quarter. The fully diluted pro forma earnings per share were $0.65 compared to $0.55 in the previous quarter and $0.22 in the Jul quarter of last year. The EPS was also better than management’s expectations of $0.59 to $0.61.

Balance Sheet

Inventories increased 7.1% to $265 million, with annualized inventory turns dropping slightly to 3.6X from 3.8X reported at the end of the last quarter. Days sales outstanding (DSOs) were flat at 45. Cash generated from operations was around $225 million. The company spent $39.1 million on capex and $65.9 million on cash dividends and $4.0 million on share repurchases in the last quarter.


Strong orders in the fiscal second quarter helped grow the ending backlog at both OEMs and distributors. This is expected to fetch revenues of $740-770 million, representing a sequential increase of 3-7% or a year-over-year increase of 30-35%. Gross margins are expected to come in at 66-67% and operating margins at 35-36%, resulting in earnings per share of $0.68-$0.72.

Our Recommendation

Given the stellar results and solid growth prospects, we expect the street to raise estimates for the rest of the year, which should improve sentiment on ADI shares. Therefore, we have a short term Buy Recommendation (Zacks #2 Rank) on the stock. However, we reiterate our longer-term Neutral recommendation until we see evidence of further momentum in results.

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