Analog Devices (ADI) Beats On Q2 Earnings And Revenues

Analog Devices Inc. (NASDAQ:ADI) reported second quarter fiscal 2016 adjusted earnings of 64 cents per share, which beat the Zacks Consensus Estimate of 62 cents. Adjusted earnings per share exclude one-time items but include stock-based compensation expenses.

Revenues

Analog Devices generated revenues of $778.8 million, up 1.2% sequentially but down 5.1% year over year. The year-over-year decline was due to significant weakness in the consumer market, especially the consumer portable segment. However, other end markets — industrial, automotive and communications infrastructure — performed in line with the company’s expectations.

Moreover, revenues were toward the higher end of the company’s guidance range of $754 million–$800 million (mid-point $777 million). It also surpassed the Zacks Consensus Estimate of $777 million.

Revenues by End Markets

Industrial market generated 49% of Analog Devices’ total revenue (up 11% sequentially but down 1% year over year). This represents a diversified market for the company, including industrial automation, instrumentation, energy, defense and health care segments.

Communications generated 23% of total revenue, up 4% sequentially but down 3% year over year.

The Automotive segment generated around 18% of Analog Devices’ second quarter revenues, up 9% sequentially but down 1% year over year.

The Consumer segment, which Analog Devices clubbed with its computing and handset businesses, plummeted 37% sequentially and 27% year over year. It accounted for 10% of total revenue.

Margins

Pro-forma gross margin was 65.8%, down 360 basis points (bps) sequentially and 70 bps year over year. The decline was primarily due to higher inventory reserves and lower utilization rates.

Analog Devices reported adjusted operating expenses of $284.8 million, up 7.6% sequentially and 5.7% year over year. Pro forma operating margin of 29.2% was up 140 bps sequentially but down 450 bps year over year.

Net Profit

On a GAAP basis, Analog Devices recorded a net profit of $170.6 million or 55 cents per share compared with $205.3 million or 65 cents in the prior quarter.

The company generated adjusted net profit of $203.3 million compared with $232.6 million in the second quarter fiscal of 2015. Pro forma earnings per share came in at 64 cents compared with 73 cents in the previous quarter.

Balance Sheet

Analog Devices exited the fiscal second quarter with cash and short-term investments of approximately $3.75 billion, down from $3.79 billion in the prior quarter. Accounts receivables were $399 million, down from $404.9 million in the previous quarter.

Long-term debt was approximately $1.7 billion, resulting in a net cash position of $2.02 billion.

Net cash flow from operations was around $320.2 million. Analog Devices spent $213.7 million on share repurchases and $130 million on cash dividends during the second quarter.

Guidance

For the third quarter of fiscal 2016, management expects revenues in a range of $800 million to $840 million. The Zacks Consensus Estimate is pegged at $800 million. On a non-GAAP basis, the company estimates gross margin to remain flat sequentially, operating expenses to be slightly up sequentially, interest and other expense of about $13 million, tax rate of approximately 12.5% and earnings per share in a range of 66–74 cents. The Zacks Consensus Estimate is pegged at 62 cents.

On a GAAP basis, the company estimates earnings per share in a range of 60–68 cents.

Our Take

Analog Devices delivered better-than-expected results for the second quarter, surpassing the Zacks Consensus Estimate for both the top and the bottom line. These strong results were driven by strong industrial, auto and communication markets, which offset the weak consumer market.

In 2015, the company successfully incorporated Hittite and expanded the available opportunities. It expects to deliver strong revenue synergies starting 2017.

The company is investing heavily in the health sector and working with several of the world's leading research institutions and system OEMs to improve performance, impact and affordability of medical electronics devices. Primary focus areas within this segment include care-imaging applications and clinical-grade vital signs monitoring.

While 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 carries a Zacks Rank #4 (Sell).

Some better-ranked stocks in the same space are Microchip Technology Inc. (NASDAQ:MCHP) , M/A-Com Technology Solutions Holdings, Inc. (NASDAQ:MTSI) and Monolithic Power Systems, Inc. (NASDAQ:MPWR) , each carrying a Zacks Rank #1 (Strong Buy).

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