Analog Devices Beats on Q2 Earnings - Analyst Blog

Analog Devices Inc. ADI reported second-quarter 2014 earnings of 59 cents per share, which surpassed the Zacks Consensus Estimate by 3 cents. Adjusted earnings per share exclude one-time items but include stock-based compensation expenses.

Revenues

Analog Devices generated revenues of $694.5 million, up 10.6 % sequentially and 5.4% year over year. Revenues were also above the Zacks Consensus Estimate of $671.0 million.

Overall, orders remained strong in the second quarter with total end customer orders, including original equipment manufacturer and distribution, increasing sequentially, led by industrial communications and automotive markets. The book-to-bill ratio was also above one.  

Revenues by End Market

The industrial market generated 47% of Analog Devices' total revenue (up 13.0% sequentially and 5.0% year over year). This is a diversified market for Analog Devices, which includes the industrial automation, instrumentation, energy, defense and healthcare segments. The increase was driven by strong growth in the instrumentation sub-sector, which was up significantly, driven by increased demand across instrumentation customers and for wireless and semiconductor test equipments.

Communications generated 22% of total revenue, up 11% sequentially and 25.0% year over year. The increase was driven by strong base-station deployments in China and capacity build-outs in the U.S.

Encouraged by the decision of the operators in China and the U.S. to increase their 4G LTE deployments in 2014, management expects growth to continue in the next year. The company's technology in these wireless applications is focused on the radio signal chain, where spectrum is digitized and radio architectures lead to higher ADI content per system, driving demand for the company's products.

The automotive segment generated around 20% of Analog Devices' second-quarter revenues, up 9.0% sequentially and 10.0% from the year-ago quarter. The increase was due to strength in content, vehicle-unit growth and share gains across all geographies.

Management continues to believe that growth in worldwide luxury vehicle will lead to solid automotive revenues in the near term. The growing electronic content in vehicles will remain a positive, with demand for products like driver assistance and powertrain efficiency systems remaining strong.

The Consumer segment, which Analog Devices clubbed with the computing and handset businesses, was up 5.0% sequentially but down 23.0% year over year. It accounted for 11.0% of total second-quarter revenue. The sequential improvement was driven by an increase in audio-video applications, while demand for digital cameras and portable applications remained modest.

Revenues by Product Line

On a year-over-year basis, revenues increased across all product lines, except in other analog and power management & reference products. However, on a sequential basis, revenues increased across all product lines.

Total analog signal processing products revenue (91% of total revenue) was up 11.0% sequentially and 5.0% year over year. Converters were up 9.0% sequentially and 8.0% year over year. Amplifier revenues increased 13.0% sequentially and 9.0% year over year. Other analog products were up 11.0% sequentially but down 5.0% from the year-ago quarter.

Power management and reference products contributed roughly 6% to the revenues, up 11% sequentially but down 1.0% from the year-ago quarter. These products are generally sold in the consumer/computing markets. Management has been refocusing on the business over the last few years to concentrate on this fast-growing product line.

Digital Signal Processing (9% of total revenue) was up 8.0% sequentially and 4.0% from the year-ago level.

Margins

Reported gross margin for the quarter was 66.1%, up 100 basis points (bps) sequentially and 210 bps year over year. The reason for the increase in gross margin was attributable to higher utilization rates and a favorable mix.

Analog reported operating expenses of $238.3 million, up 3.3% from $230.8 million incurred in the year-ago quarter. Research & development expenses increased as a percentage of sales from the year-ago quarter while selling, marketing and general and administrative expenses declined. The net result was a GAAP operating margin of 31.7%, up 270 bps from the year-ago quarter of 29.0%.

Net Profit

On a GAAP basis, Analog Devices recorded a net profit of $187.4 million or 59 cents per share compared with $164.5 million or 52 cents per share in the year-ago quarter.

The company generated adjusted net profit of $187.4 million compared with $163.0 million in the year-ago quarter. Pro-forma earnings came in at 59 cents per share compared with 52 cents in the year-ago quarter.

Balance Sheet

Analog Devices exited the second quarter with cash and short-term investments of approximately $4.81 billion, up from $4.70 billion in the prior quarter. Trade receivables were $360.8 million, up from $328.1 million in the prior quarter.

Long-term debt was approximately $872.5 million, slightly up from $872.4 million in the prior quarter.

Cash generated from operations was around $238.4 million. Analog Devices spent $44.1 million on capex, $22.6 million on share repurchases and $115.8 million on cash dividends.

Analog Devices also declared a cash dividend of 37 cents per share to be paid on Jun 10, 2014 to all shareholders of record at the close of business on May 30.

Guidance

Management expects third-quarter 2014 revenues to increase 1% to 5% sequentially. The company estimates gross margin to increase 50 bps sequentially, operating expenses to be flat to up 3%, tax rate to be approximately 13.5% and earnings per share in the range of 60–64 cents. The Zacks Consensus Estimate for third-quarter earnings is pegged at 61 cents.

Our Take

A significant percentage of Analog Devices' revenues comes from the industrial and communication markets, both of which are expected to see strong demand in 2014. The increased 3G and 4G deployments in China and the U.S. will revive growth in these markets, going forward.

Management expects solid operating leverage in the upcoming quarter on improving factory utilization and a favorable mix of business. Also, the company witnessed strong order momentum in the reported quarter due to improvement in end markets. Given these positives, it is not surprising that the guidance for revenues and margins were up sequentially.

However, with a high cost structure due to continuous investments, increasing competition in the analog market and continued uncertainty in key end markets, the shares may remain range-bound in the near term.

Currently, Analog Devices has a Zacks Rank #4 (Sell). Other stocks that are performing well at current levels include NetScout Systems, Inc. NTCT, Infinera Corp. INFN and QLogic Corp. QLGC. All these stocks sport a Zacks Rank #2 (Buy).