Analog Devices Inc. (ADI - Analyst Report) reported third-quarter 2014 earnings of 63 cents per share, in line with the Zacks Consensus Estimate. Adjusted earnings per share exclude one-time items but include stock-based compensation expenses.
Analog Devices generated revenues of $727.8 million, up 4.8% sequentially and 7.9% year over year. Revenues were at the higher end of its guidance and also above the Zacks Consensus Estimate of $716.0 million.
Overall, orders remained strong in the third quarter with total end customer orders, including original equipment manufacturer and distribution, increasing sequentially. The book-to-bill ratio was slightly above 1.
Revenues by End Market
The Industrial market generated 48% of Analog Devices’ total revenue (up 8% sequentially and 12% 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, with the strongest sequential revenue growth in the industrial automation, instrumentation, aerospace and energy sectors.
Communications generated 23% of total revenue, up 7% sequentially and 19% year over year, driven by strong wireless infrastructure sales. Continued 4G deployments in the U.S. and China drove higher sales in this end market. Wireline business also improved sequentially driven by new designs in 100-gig optical applications.
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 18% of Analog Devices’ third-quarter revenues, down 4% sequentially due to seasonality. However, revenues were up 8% from the year-ago quarter driven by continued strength in North America and China 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 4% sequentially but down 19% year over year. It accounted for 11% of total third-quarter revenue. The sequential improvement was driven by an increase in audio-video applications, while demand for digital cameras and portable applications remained flat. However, the year-over-year decline was due to the divestiture of the microphone product line.
Revenues by Product Line
Revenues increased across all product lines, both year over year and sequentially.
Total analog signal processing products revenue (91% of total revenue) was up 4.4% sequentially and 7.7% year over year. Converters were up 3% sequentially and 9% year over year. Amplifier revenues increased 4% sequentially and 9% year over year. Other analog products were up 9% sequentially and 4% from the year-ago quarter.
Power management and reference products contributed roughly 6% to the revenues, up 6% sequentially and 1% from the year-ago quarter. These products are generally sold in the consumer/computing markets. Management has been refocusing on the business over the last few years to concentrate on this fast-growing product line.
Digital Signal Processing (9% of total revenue) was up 9% sequentially and 10% from the year-ago level.
Reported gross margin for the quarter was 65.4%, down 70 basis points (bps) sequentially but up 90 bps year over year. The year-over-year increase in gross margin was attributable to higher utilization rates and a favorable mix.
Analog reported operating expenses of $273.7 million, up 20.7% from $226.7 million incurred in the year-ago quarter. Both research & development, and selling, marketing and general & administrative expenses increased as a percentage of sales from the year-ago quarter. The net result was a GAAP operating margin of 27.8%, down 310 bps from the year-ago quarter figure of 30.9%.
On a GAAP basis, Analog Devices recorded a net profit of $180.6 million or 57 cents per share compared with $176.2 million or 56 cents per share in the year-ago quarter.
The company generated adjusted net profit of $200.9 million compared with $179.8 million in the year-ago quarter. Pro-forma earnings came in at 63 cents per share compared with 57 cents in the year-ago quarter.
AnalogDevices exited the third quarter with cash and short-term investments of approximately $4.93 billion, up from $4.81 billion in the prior quarter. Trade receivables were $394.8 million, up from $360.8 million in the prior quarter.
Long-term debt was approximately $872.7 million, slightly up from $872.5 million in the prior quarter.
Cash generated from operations was around $213.4 million. Analog Devices spent $42.3 million on capex, $57.4 million on share repurchases and $116.1 million on cash dividends.
AnalogDevices also declared a cash dividend of 37 cents per share to be paid on Sep 17, 2014 to all shareholders of record at the close of business on Sep 5.
Management expects fourth-quarter 2014 revenues in the range of $790–$820 million. The company estimates non-GAAP gross margin to be approximately 66.2%, operating expenses in the range of $268–$271 million, interest and other expense of approximately $6 million, tax rate in the range of 15.5–16.0% and earnings per share in the range of 66–70 cents. The Zacks Consensus Estimate for fourth-quarter earnings is pegged at 67 cents.
A significant percentage of Analog Devices’ revenues comes from the Industrial and Communication markets, both of which are seeing strong demand. The increased 4G deployments in China and the U.S. will continue to improve growth in these markets, going forward.
Management expects solid operating leverage in the upcoming quarter on improving factory utilization and a favorable mix of business. Also, the company witnessed strong order momentum in the reported quarter due to improvement in end markets.
Additionally, the company completed the acquisition of Hittite Microwave Corporation during the reported quarter. The acquisition complements Analog Devices’ commitment to offer high frequency chips and other signal processors. Hittite’s offerings will strengthen Analog Devices’ 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.
Other Stocks to Consider
Currently, Analog Devices has a Zacks Rank #2 (Buy). Other better-ranked stocks that are performing well at the current levels include Mercadolibre, Inc. (MELI - Snapshot Report) and World Energy Solutions, Inc. (XWES), sporting a Zacks Rank #1 (Strong Buy), and Garmin Ltd. (GRMN - Analyst Report) with a Zacks Rank #2.