Analog Devices Flayed by Macro Weakness
by Sejuti BanerjeaNovember 28, 2012 | Comments : 0 Recommended this article: (0)
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Analog Devices’ ( ADI - Analyst Report ) fiscal fourth quarter earnings beat the Zacks Consensus Estimate by a penny. Revenue fell short of expectations however. The top line softness and disappointing guidance had shares slumping 2.77% in after-hours trading.
Analog Devices generated revenue of $695.0 million, which was up 1.7% sequentially, down 3.0% year over year and just within management’s revenue guidance range of $685-$715 million (a 0-5% sequential increase).
Revenue by End Market
The industrial market generated 44% of Analog Devices’ total revenue (down 5.5% sequentially and 3.0% year over year). This is a very diversified market for Analog Devices, including the industrial automation, instrumentation, energy, defense and healthcare segments.
Management optimism gave way in the last quarter, as the macro weakness had Analog’s industrial customers (both distribution and OEM) cutting inventories and orders. Europe and Japan were the weakest for Analog. Defense, aerospace and medical instrumentation product lines were flat sequentially, but offset by declines across the process control, instrumentation, measurement and medical imaging product lines.
Communications generated 20% of total revenue, up 3.8% sequentially and 1.1% year over year. Analog’s communications business now constitutes infrastructure sales alone. This business should continue on an uptrend as there is great focus on 4G and LTE by leading phone makers, such as Samsung and Apple (AAPL).
Additionally, infrastructure buildouts in emerging continues demand for its legacy products. Analog Devices has offerings for both the traditional and 4G networks, so it stands to gain when there is any increase in demand. Additionally, it has higher content in the 4G segment, which along with its position at leading OEMs should remain a positive factor influencing revenue growth.
Consumer, which Analog clubs with the computing and handset businesses, grew a very strong 26.4% in the last quarter to 20% of revenue. This was still 7.4% below the level generated a year ago. The sequential increase was on driven by some Analog customers building inventories of new products. Therefore, a sharp decline in the next quarter may be expected.
The automotive segment generated around 16% of Analog Devices’ fourth quarter revenue, down 3.9% sequentially and 2.0% from the year-ago quarter. Sluggish demand in Europe due to weaker sales and more factory shut-downs impacted Analog’s automotive revenue in the last quarter. The growing electronic content in vehicles remained a positive however, with demand for products like driver assistance and powertrain efficiency systems remaining strong.
Revenue by Product Line
The year-over-year decline in revenue was broad-based across product lines. The other analog category was again the only one posting any substantial increase.
Analog signal processing products (85% of total revenue) were up 2.6% sequentially and down 2.2% year over year. Converters were up 2.6% sequentially while declining 5.0% year over year. Amplifier revenue declined 3.5% sequentially and 4.5% year over year. Other analog products jumped 14.1% and 10.9% from the previous and year-ago quarters, respectively.
Power management and reference products remained at roughly 7% of revenue, flat sequentially and down 13.8% from the year-ago quarter. These products are generally sold into the consumer/computing markets. Management has refocused the business over the last few years to concentrate on this fast-growing product line.
DSPs (8% of total revenue) were down 6.0% sequentially and consistent with the year-ago level.
Analog Devices generated a pro forma gross margin of 63.8%, down 179 basis points (bps) sequentially, 52 bps year over year and short of management’s gross margin guidance of 65%. The primary reason for the gross margin decline was the change in sales mix, which favored lower-margin products in the last quarter. However, management also decided to reduce production to align inventories with demand, which had the utilization rate dropping from 74% in the July quarter to 67% in the last quarter.
Operating expenses of $228.0 million were down 3.1% sequentially and 1.2% from the October quarter of 2011. Special charges related to restructuring activity were absent in the last quarter, despite which however the operating margin shrunk 13 bps sequentially and 188 bps year over year to 31.0%.
The pro forma net income was $179.2 million, or a 25.8% net income margin compared to $169.8 million, or 24.9% in the previous quarter and $183.5 million, or a 25.6% net income margin in the year-ago quarter. The fully diluted pro forma earnings per share were 58 cents compared to 56 cents in the previous quarter and 60 cents in the October 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.
Inventories increased 0.5% to $339.9 million, with annualized inventory turns going up from 3.0X to 3.2X. Days sales outstanding (DSOs) dropped from 46 to around 45. Cash generated from operations was around $236.0 million. Analog Devices spent $37.5 million on capex, $91.4 million on cash dividends and $20.8 million on share repurchases in the last quarter.
Management expects first quarter revenue of $612-$653 million (a 6-12% sequential decline) with a gross margin of 62%, operating expenses of around $223 million, a tax rate of 18% and diluted EPS of 40-48 cents. Analysts polled by Zacks expected earnings of 54 cents a share when Analog Devices reported, well above the guided range.
Analog Devices has a significant percentage of its revenue coming from the industrial and automotive markets, both of which are expected to remain sluggish in the near term as macro concerns continue to weigh on its customers. Additionally, the company is now expecting a sharp reduction in its consumer revenue, which will make matters worse.
Given these negatives, it is not surprising that the guidance was again below expectations. With continued uncertainty in key markets and the weak guidance, estimates are likely to track lower. This should keep the Zacks Rank at #4 (Sell). In fact, companies with industrial and automotive focus are unlikely to do very well in this environment, for instance, Linear Technology Corp (LLTC), which also has a Zacks Rank of #4.
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