Analog's 2Q Earnings Miss Estimate

Zacks

Analog Devices Inc. (ADI) reported second quarter 2013 earnings of 50 cents per share, missing the Zacks Consensus Estimate of 52 cents. Adjusted earnings per share exclude one-time items but include stock-based compensation expense.

Revenues

Analog Devices generated revenues of $659.3 million, up 6.0% sequentially but down 2.3% year over year. The sequential growth was within management’s guidance of 4–8% increase and was driven by the strength in industrial and automotive segments.

In the last quarter, total end customer orders, which include both OEM and distribution, was up sequentially. Also, the book-to-bill ratio was slightly above unity.

Geographically, orders improved across all regions, with particular strengths in North America and Europe.

Revenues by End Market

The industrial market generated 47% of Analog Devices’ total revenue (up 11.0% sequentially but down 4.0% year over year). This is a diversified market for Analog Devices, including the industrial automation, instrumentation, energy, defense and healthcare segments.

Management expects the industrial end market to register strong growth in the third quarter as order rates have been improving and inventory levels remain low.

The automotive segment generated around 19% of Analog Devices’ second quarter revenues, up 14.0% sequentially and 3.0% from the year-ago quarter. Strong vehicles demand in North America and China and growth in worldwide luxury vehicle led to solid automotive revenues in the last quarter. The growing electronic content in vehicles remained a positive, with demand for products like driver assistance and powertrain efficiency systems remaining strong.

Communications generated 19% of total revenue, down 2.0% both sequentially as well as 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 leading phone makers, such as Samsung and Apple (AAPL), focus more on 4G and LTE. Analog Devices has offerings for both traditional and 4G networks and therefore stands to gain from demand ramp. 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 clubbed with the computing and handset businesses, was down 6.0% sequentially and 5% year over year. It accounted for 15% of total second quarter revenues.

Revenues by Product Line

On a sequential basis, revenues increased across all product lines, except in the other analog products. On the contrary, revenues decreased across all product lines on a year-over-year basis, except in converters.

Analog signal processing products (85% of total revenue) were up 5.0% sequentially but down 2.0% year over year. Converters were up 9.0% sequentially and 1.0% year over year. Amplifier revenues increased 4.0% sequentially and declined 7.0% year over year. Other analog products were down 4.0% sequentially but up 2.0% from year-ago quarters.

Power management and reference products remained at roughly 7% of revenues, up 11.0% sequentially but down 5.0% from the year-ago quarter. These products are generally sold in 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) (9% of total revenue) was up 11.0% sequentially but down 6.0% from the year-ago level.

Margins

Reported gross margin for the quarter was 64.0%, up 130 basis points (bps) sequentially but down 120 bps year over year. The primary reason for the sequential increase in gross margin was attributable to higher factory utilization and lower manufacturing costs.

Analog reported operating expenses of $230.8 million, up 1.5% from $227.5 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 29.0% compared with 31.5% in the year-ago quarter.

Net Profit

On a GAAP basis, Analog recorded a net profit of $164.5 million or 52 cents per share compared with $162.9 million or 53 cents per share in the year-ago quarter.

Analog generated adjusted net profit of $156.7 million compared with $162.1 million in the year-ago quarter. Pro forma earnings per share came in at 50 cents compared with 53 cents in the last quarter.

Balance Sheet

Analog exited the second quarter with cash and short-term investments of approximately $4.17 billion, up from $3.99 billion in the prior quarter. Trade receivables were $333.9 million, up from $329.6 million in the prior quarter.

Cash generated from operations was around $252.2 million. Analog Devices spent $26.2 million on capex, $104.4 million on cash dividends and $4.5 million on share repurchases in the last quarter.

During the quarter, the company announced that its board of directors has declared a cash dividend of 34 cents per outstanding share of common stock. The dividend will be paid on Jun 11, 2013 to all shareholders of record at the close of business on May 31, 2013.

Guidance

Management expects third quarter revenues to be in the range of $655 to $685 million, up 1.6% sequentially but lower than analyst expectations of $688 million. The company estimates gross margin to be 64.5%, operating expenses of around $226 million, a tax rate of 16.5% and earnings per share of 51–56 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.

Given these positives, it is not surprising that the revenue guidance was up sequentially but below analyst expectations. 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 Magnachip Semiconductor (MX) and Microchip Technology (MCHP), both with a Zacks Rank #2 (Buy).

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