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Analog Devices (ADI - Analyst Report) reported first-quarter 2013 earnings of 44 cents per share, in line with the Zacks Consensus Estimate. Adjusted earnings per share exclude one-time items, but include stock-based compensation expense.

Revenues

Analog Devices generated revenues of $622.1 million, down 10.0% sequentially and 4.0% year over year and at the lower end of the management’s revenue guidance range of $612-$653 million (a 6%-12% sequential decline).

Revenues by End Market

The industrial market generated 45% of Analog Devices’ total revenue (down 8.0% sequentially and 3.0% year over year). This is a 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.

Management expects the industrial end market to register strong growth in the second quarter as order rates have been improving since early January.

Communications generated 20% of total revenue, down 12.0% sequentially but up 2.0% year over year. The decline was broad based, with the largest sequential decrease coming from the wireless infrastructure sub-segment. Though the market performed poorly in the last quarter, management expects the business to improve, as there is great focus on 4G and LTE by leading phone makers, such as Samsung and Apple (AAPL - Analyst Report). 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.

The Consumer segment, which Analog clubs with the computing and handset businesses, was down 22.0% sequentially and 6% year over year, due to seasonality.

The automotive segment generated around 17% of Analog Devices’ first quarter revenues, down 3.0% sequentially and 11.0% from the year-ago quarter. Sluggish demand in Europe due to weaker sales affected Analog’s automotive revenues 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.

Revenues by Product Line

The sequential and year-over-year decline in revenues was broad-based across product lines.

Analog signal processing products (85% of total revenue) were down 11.0% sequentially and 3.0% year over year. Converters were down 10.0% sequentially and 3.0% year over year. Amplifier revenues declined 10.0% sequentially and 4.0% year over year. Other analog products were down 15.0% and 1.0% from the previous and year-ago quarters, respectively.

Power management and reference products remained at roughly 6% of revenues, down 14.0% sequentially and 12.0% 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.  

Digital Signal Processing (DSPs) (8% of total revenue) were down 10.0% sequentially and 4.0% from the year-ago level.

Margins

Reported gross margin for the quarter was 62.7%, down 110 basis points (bps) sequentially and 50 bps year over year. The primary reason for the gross margin decline was the change in sales mix, which favored lower-margin products in the last quarter.

Analog reported operating expenses of $222.8.0 million, down 0.3% from $223.4 million incurred in the year-ago quarter. Research and development and selling, general and administrative costs, were both up as a percentage of sales from the year-ago quarters. The net result was a GAAP operating margin of 24.7% compared with 28.3% in the year-ago quarter.

Net Profit

On a GAAP basis, Analog recorded a net profit of $131.2 million or 42 cents per share compared with $139.4 million or 46 cents per share in the year-ago quarter.

Analog generated adjusted net profit of $136.5 million compared with$140.5 million in the year-ago quarter. Pro-forma earnings per share came in at 44 cents, compared with 46 cents in the last quarter.

Balance Sheet

Analog exited the first quarter with cash and short-term investments of approximately $3.99 billion, up from $3.90 billion in the prior quarter. Trade receivables were $329.6 million, down from $339.9 million in the prior quarter.

Cash generated from operations was around $158.0 million. Analog Devices spent $18.3 million on capex, $90.7 million on cash dividends and $17.0 million on share repurchases in the last quarter.

During the quarter, the company announced that its board of directors has approved a 13% increase in its regular quarterly dividend, from $0.30 to $0.34 30 cents to 34 cents per outstanding share of common stock. The dividend will be paid on Mar 12, 2013, to all shareholders of record at the close of business on as of Mar 1, 2013.

Guidance

Management expects second-quarter revenues to increase 4%–8% sequentially with a gross margin of 64%, operating expenses of around $224 million, a tax rate of 17% and EPS of 49–55 cents.

Our Take

Analog Devices has a significant percentage of its revenues coming from the industrial and automotive markets, both of which are expected to see strong demand in the near term due to an improved demand environment and healthy order rates expected in the industrial market. The dividend hike was also quite encouraging in the last quarter.

Given these positives, it is not surprising that the revenue guidance was up sequentially but below the consensus expectations of $666 million. However, with continued uncertainty in key markets, the shares may remain range bound in the near term.

Currently, Analog has a Zacks Rank #3 (Hold). Other stocks that have been performing well and are worth a look include Autodesk Inc. (ADSK - Analyst Report) and Netflix Inc. (NFLX - Analyst Report), both with a Zacks Rank #2 (Buy).

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