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Analog Devices (ADI) Beats Q3 Earnings and Revenue Estimates

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Analog Devices Inc. (ADI - Free Report) reported fiscal third-quarter 2017 adjusted earnings of $1.26 per share, which beat the Zacks Consensus Estimate of $1.15.

The better-than-expected results were driven by strength across all the markets - industrial, automotive, consumer and communications, and positive contributions from Linear Technology acquisition.

At the call, management sounded upbeat about value creation and cost synergy possibilities in relation to the acquisition. The merger has created an analog industry leader across a huge range of products, customer breadth and scale.

The deal significantly expanded Analog Devices' total addressable market allowing it to cater to phenomenal demand in some of the most attractive markets such as industrial, automotive and communications infrastructure markets.

Concurrent with the release of quarterly results, the company declared a quarterly cash dividend of 45 cents per share, translating into annual dividend of $1.80. While its investments are aimed at strengthening the product line and countering increasing competition, the policy of returning cash through dividends and share buybacks will ensure investor loyalty.

Analog Devices stock has gained 13.8% year to date, underperforming the 15.3% rally of the industry it belongs to.

Let’s delve deeper into the numbers.

Revenues

Analog Devices generated revenues of $1.43 billion, up nearly 25% sequentially and a massive 65% year over year. The year-over-year increase was attributable to improved performance across all the markets.

Analog Devices, Inc. Price, Consensus and EPS Surprise

Moreover, revenues exceeded the guidance range of $1.34 - $1.42 billion. It also surpassed the Zacks Consensus Estimate of $1.40 billion.

Revenues by End Markets

The Industrial market generated 49% of Analog Devices’ total revenue (up 29% sequentially and 87% year over year). This represents a diversified market for the company, including industrial automation, instrumentation, energy, defense and health care segments.

Communications generated 18% of total revenue, up 20% sequentially and 45% year over year. The Automotive segment generated around 16% of Analog Devices’ third-quarter revenues, up 25% sequentially and 69% year over year.

The Consumer segment, which Analog Devices clubs with its computing and handset businesses, increased 19% sequentially and 36% year over year. It accounted for 18% of total revenue.

Margins and Net Income

Non-GAAP gross margin was 70.5%, up 120 basis points (bps) sequentially and 450 bps year over year.

Analog Devices reported adjusted operating expenses of $437.1 million, up 15% sequentially and 57.4% year over year. Non-GAAP operating margin of 40.5% was up 260 bps sequentially and 640 bps year over year.

On a GAAP basis, Analog Devices recorded net profit of $68.9 million or 18 cents compared with $230.4 million or 74 cents in the year-ago quarter.

Balance Sheet

Analog Devices exited the third quarter with cash and short-term investments of approximately $908.6 million, down from $6.3 billion in the prior quarter. Accounts receivables were $692.6 million, up from $630.4 million in the previous quarter. Long-term debt was approximately $8.2 billion.

Net cash used for operations was around $364.3 million. Analog Devices spent about $9 million on share repurchases and $166.3 million on cash dividends during the third quarter.

Guidance

For fiscal fourth quarter of 2017, management expects revenues in the range of $1.45 billion to $1.55 billion, better than the Zacks Consensus Estimate of $1.46 billion at mid-point.

On a non-GAAP basis, the company estimates gross margin of approximately 70.5%. Operating expenses are expected to be down roughly 3% to flat.

Analog Devices expects interest and other expense of approximately $65 million and tax rate of approximately 10%. Earnings per share are expected in the range of $1.29 to $1.43, better than the Zacks Consensus Estimate of $1.25.

Zacks Rank and Stocks to Consider

Better-ranked stocks in the broader technology sector include Applied Materials (AMAT - Free Report) , Activision Blizzard (ATVI - Free Report) and Applied Optoelectronics (AAOI - Free Report) , all sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term earnings growth rate for Applied Materials, Applied Optoelectronics and Activision is currently projected to be 17.1%, 17.5% and 13.6%, respectively.

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