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Analog Devices Inc. (ADI) reported first-quarter 2014 earnings of 49 cents per share, which surpassed the Zacks Consensus Estimate by a penny. Adjusted earnings per share exclude one-time items but include stock-based compensation expenses.

Revenues

Analog Devices generated revenues of $628.2 million, down 7.4% sequentially but up 1.0% year over year. The revenues were slightly lower than the Zacks Consensus Estimate of $629.0 million. Excluding the microphone business, divested in the fourth quarter, revenues were up 5% year over year.

Total end customer orders, which include original equipment manufacturer (OEM) and distribution, improved in the last quarter, led by the industrial communications and automotive markets. The book-to-bill ratio was also above one.  

Revenues by End Market

The industrial market generated 46% of Analog Devices’ total revenue (down 7.0% sequentially but up 3.0% year over year). This is a diversified market for Analog Devices, including the industrial automation, instrumentation, energy, defense and healthcare segments. The sequential decline was due to increased number of holidays in the last quarter.

Communications generated 22% of total revenue, flat sequentially but up 11.0% year over year. The modest sequential growth in the wireless infrastructure sub-segment driven by deployments in North America and Asia was partially offset by inventory reductions at some base-station customers, resulting in no sequential growth.

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 resume in the next year.

The automotive segment generated around 20% of Analog Devices’ first-quarter revenues, down 5.0% sequentially but up 15.0% from the year-ago quarter. The sequential decline was due to seasonal production breaks taken by the manufacturers of North America and Europe. The year-over-year increase was due to strength in content 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 down 22.0% sequentially and 31.0% year over year. It accounted for 12.0% of total first-quarter revenue.

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, the decline in revenues was broad-based across product lines.

Total Analog signal processing products revenue (91% of total revenue) was down 7.0% sequentially but up 1.0% year over year. Converters were down 5.0% sequentially but up 5.0% year over year. Amplifier revenues declined 7.0% sequentially but increased 4.0% year over year. Other analog products were down 14.0% sequentially and 17.0% from the year-ago quarter.

Power management and reference products contributed roughly 6% of revenues, down 12% sequentially and 2.0% 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 down 7.0% sequentially but up 6.0% from the year-ago level.

Margins

Reported gross margin for the quarter was 65.1%, down 500 basis points (bps) sequentially but up 240 bps year over year. The reason for the sequential decrease in gross margin was attributable to lower utilization rates and an unfavorable mix.

Analog reported operating expenses of $229.5 million, down 3.1% from $236.8 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 28.6%, up 390 bps from the year-ago quarter of 24.7%.

Net Profit

On a GAAP basis, Analog Devices recorded a net profit of $152.6 million or 48 cents per share compared with $131.2 million or 42 cents per share in the year-ago quarter.

The company generated adjusted net profit of $155.8 million compared with $136.5 million in the year-ago quarter. Pro-forma earnings came in at 49 cents per share compared with 44 cents in the year-ago quarter.

Balance Sheet

AnalogDevices exited the first quarter with cash and short-term investments of approximately $4.70 billion, up from $4.68 billion in the prior quarter. Trade receivables were $328.1 million, up from $325.1 million in the prior quarter.

Cash generated from operations was around $157.5 million. Analog Devices spent $48.1 million on capex, $89.0 million on share repurchases and $106.0 million on cash dividends.

AnalogDevices has also announced its decision to hike quarterly dividend by 3 cents to 37 cents per share. This dividend will be paid on Mar 11, 2014 to all shareholders of record at the close of business on Feb 28, 2014.

In addition, the company approved the share repurchase authorization to $1 billion.

Guidance

Management expects second-quarter 2014 revenues in the range of $660 to $680 million. The Zacks Consensus Estimate for second-quarter revenues is pegged at $665 million. The company estimates gross margin to increase 50 to 100 bps sequentially, operating expenses to increase approximately 2%, tax rate to be approximately 13% and earnings per share in the range of 54–58 cents. The Zacks Consensus Estimate for second-quarter earnings is pegged at 55 cents.

Our Take

Analog Devices has a significant percentage of its revenues coming 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 starting from January due to improvement in end markets. Given these positives, it is not surprising that the guidance for revenues and margins were up sequentially.

Also, the increase in dividend and new share authorization program indicates that the company is heading toward strong future growth. However, with continued uncertainty in key markets, the shares may remain range-bound in the near term.

Currently, Analog Devices has a Zacks Rank #3 (Hold). Other stocks that are performing well at current levels include M/A-Com Technology Solutions Holdings, Inc. (MTSI), Maxlinear Inc. (MXL) and Supertex Inc. (SUPX). All these stocks sport a Zacks Rank #2 (Buy).

 
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