Earnings Preview: Analog Devices

Zacks Equity Research

Analog Devices, Inc. (ADI) is scheduled to announce its fiscal second-quarter 2012 results on May 22. We witness only one downward movement in analyst estimates in the build-up to the release.

Prior-Quarter Synopsis

Analog’sfirst quarter 2012 pro forma earnings missed the Zacks Consensus Estimate by a couple of cents due to weaker-than-expected revenue and margins.

Revenue in the quarter was $648.1 million, down 9.5% sequentially and 11.0% year over year, particularly due to the weakness in the consumer, communications and industrial end markets. However, the automotive segment performed well in the quarter on account of increased use of electronic content in automobiles, growing dollar content per vehicle for Analog and higher sales of vehicles.

Gross margin of 63.2% was down both sequentially and year over year, impacted by lower utilization rates, as Analog tried to keep internal inventories under control.

Second Quarter Guidance

Management expects second quarter revenue of $655-$675 million (a 1-4% sequential increase) with the gross margin at 64-64.5%, operating expenses of around $226 million and diluted EPS of 48-53 cents. For the second quarter, the Zacks Consensus Estimate is pegged at 51 cents, at the high end of the guided range.

(Detailed earnings results can be viewed in the blog titled: Analog Devices Optimistic Despite Miss

Agreement of Analysts

Out of the 18 analysts providing estimates for the second quarter, none made any revision in the last 30 days. For fiscal 2012, only 1 analyst made a downward revision over the same 30-day time period.

The majority of analysts expect a decent second quarter with revenue and non-GAAP EPS (including options) in line with the Street consensus estimates of $666 million and $0.51, respectively.

The analysts expect to see strength in the automotive end market and stabilization in industrial and communications (driven by 3G deployments in China), which have remained weak thus far. They contend that 3G deployments and growing semiconductor content in automobiles will drive the company’s future revenue growth. They also believe that wireless infrastructure is another area of revenue growth with strength in wireless base station build-outs owing to continued expansion into China, Europeand North America.

However, a handful of analysts do not expect a strong quarter due to some softness in the end markets and uncertainty in the current environment. They state that demand uncertainty has continued, particularly, in industrial and communications end markets, which together comprise roughly 65% of Analog’s total revenue.

Magnitude of Estimate Revisions

In the past 30 days, there was no change to the Zacks Consensus Estimate for the second quarter but the estimate for fiscal 2012 dropped a penny to $2.18.

Over the 90-day period, the Zacks Consensus Estimate fell 3 cents to 51 cents for the second quarter and 10 cents to $2.18 for fiscal 2012.

The weak demand environment and lower-than-expected guidance announced by management during the first quarter earnings call, might have prompted the reduction in estimates.

Our Recommendation

Analog Devices is a leading supplier of analog and DSP integrated circuits. We remain encouraged by the company’s dominant position in many of its product segments, and meaningfully improved gross and operating margin structures.

However, we do not expect Analog Devices to see a strong second quarter due to a tough macroeconomic environment and softness within the communications and industrial infrastructure markets.

Analog, which competes with other large analog players, such as Intersil Corporation, Linear Technology Corp(LLTC), Maxim Integrated Products (MXIM) and Texas Instruments (TXN),holds a Zacks #4 Rank that translates into a short-term ‘Sell’ rating.

Read the Full Research Report on MXIM

Read the Full Research Report on TXN

Read the Full Research Report on LLTC

Read the Full Research Report on ADI

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