Analog Devices
' (
ADI
) fiscal second quarter earnings beat the Zacks Consensus Estimate
by a couple of cents. Revenue exceeded the consensus by 1.4%.
Revenue
Analog Devices generated revenue of $675.1 million, which was up
4.2% sequentially, down 14.6% year over year and just over
management's revenue guidance range of $655-$675 million (a 1-4%
sequential increase).
Revenue by End Market
The
industrial
market generated 48% of Analog Devices' total revenue (up 11.8%
sequentially and down 16.4% year over year). This is a very
diversified market for Analog Devices, including the industrial
automation, instrumentation, energy, defense and healthcare
segments.While each sub-segment grew in the last quarter,
instrumentation and energy were up over 20% each.
The strong sequential performance is partly on account of
positive seasonality and partly driven by improving market
conditions, as customer inventories dropped to satisfactory levels,
enabling Analog to ship to consumption.
Communications
generated 19% of total revenue, up 2.5% sequentially and down 22.3%
year over year. Analog Devices' communications business now
constitutes infrastructure sales alone. Management attributed the
sequential increase to both wireline and wireless customers that
were prompted by growing data volumes, although growth rates
remained low due to the back-end loaded quarter and continued
economy-related concerns.
Consumer
, which now includes the computing (1% of fiscal 2011 revenue) and
handset (3% of fiscal 2011 revenue) businesses, generated 16% of
revenue, down 7.6% sequentially and 20.2% from a year ago. Here
too, orders started strengthening toward the end of the quarter,
indicating improving trends that should lead to stronger revenues
going forward. Analog stated that strong design in at key consumer
OEMs would support this growth.
The
automotive
segment generated around 17% of Analog Devices' second quarter
revenue, down 0.9% sequentially and up 10.1% from the year-ago
quarter. The increase in vehicle sales, growing electronic content
in vehicles and growing dollar content per vehicle for Analog
helped sales in the last quarter.
Revenue by Product Line
The year-over-year decline in revenue was more or less
broad-based across product lines, with only the digital signal
processing (DSP) products saying flat. On the other hand, all
except the other analog category increased sequentially.
Analog signal processing products (84% of total revenue) were up
4.2% sequentially and down 15.7% year over year. Converters and
amplifiers were up 5.2% and 8.1%, respectively on a sequential
basis, while declining 14.3% and 16.6%, respectively from last
year.
Other analog products were down 5.7% from the previous quarter
and 18.2% from the year-ago quarter. The three product lines
generated 44%, 26% and 13% of quarterly revenue, respectively.
Power management and reference products remained at roughly 7%
of revenue, up 2.7% and down 17.9%, respectively from the previous
and year-ago quarters. These products are generally sold into 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 up 5.3% sequentially and flat
year over year.
Margins
Analog Devices generated a pro forma gross margin of 65.2%, up
207 basis points (bps) sequentially, down 231 bps year over year
and better than management's guidance of 64-64.5%. Both utilization
and a stronger mix of high-margin industrial and communications
infrastructure products were responsible for the sequential
increase. The decline from the year-ago quarter was mainly on
account of significantly lower volumes.
Operating expenses of $227.5 million were flattish sequentially
and down 3.5% from the April quarter of 2011. As a result, the
operating margin expanded 324 bps sequentially even as it shrunk
621 bps year over year to 31.5%.
Lower cost of sales was the main reason for the sequential
increase in margin, although both R&D and SG&A also
declined as a percentage of sales. However, all expenses were up
significantly as a percentage of sales from the year-ago quarter
with SG&A increasing somewhat less than the others.
Net Profit
The pro forma net income was $162.9 million, or a 24.1% net
income margin compared to $139.4 million, or 21.5% in the previous
quarter and $245.3 million, or a 31.0% net income margin in the
year-ago quarter. The fully diluted pro forma earnings per share
were 53 cents compared to 46 cents in the previous quarter and 79
cents in the April 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 same.
Balance Sheet
Inventories increased 2.2% to $303.7 million, with annualized
inventory turns dropping sequentially from 3.2X to 3.1X. Days sales
outstanding (DSOs) inched up to a little less than 45. Cash
generated from operations was around $226.0 million. Analog Devices
spent $30.1 million on capex, $24.2 million on acquisitions, $89.4
million on cash dividends and $44.0 million on share repurchases in
the last quarter.
Guidance
Management expects third quarter revenue of $682-$702 million (a
1-4% sequential increase) with the gross margin to increase 50 bps,
operating expenses of around $231 million and diluted EPS of 54-58
cents. Analysts polled by Zacks expected earnings of 58 cents a
share when Analog Devices reported, at the high end of the guided
range.
Our Take
Given improving order trends in the back half of the quarter and
historic low lead times, Analog expects most end markets to turn
around in the current quarter. Channel inventories also appear
lean, meaning that the company is now shipping to consumption.
However, we detect caution at communications customers, which could
mean slower revenue growth in the segment.
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 investor sentiments to remain low, since
analysts are likely to lower their earnings estimates to reflect
the guidance, thereby strengthening the Zacks Rank of #4 on Analog
shares, which implies a Sell rating over the next 1-3 months.
We note that other analog peers, such as
Texas Instruments
(
TXN
) and
Linear Technology
Corp
(
LLTC
) bear a Zacks Rank of #3 (short-term Hold), while
Maxim Integrated Products
(
MXIM
) is currently ranked #2 (short-term Buy).
ANALOG DEVICES (ADI): Free Stock Analysis
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