Analog Devices (ADI) Beats On Q3 Earnings, Revenues

Analog Devices Inc. (NASDAQ:ADI) reported third quarter fiscal 2016 adjusted earnings of 82 cents per share, which beat the Zacks Consensus Estimate of 76 cents. Adjusted earnings per share exclude one-time items but include stock-based compensation expenses.

Revenues

Analog Devices generated revenues of $869.6 million, up 11.7% sequentially and 0.7% year over year. The sequential growth was due to improved performance in the consumer market offsetting weakness in industrial, automotive and communications markets.

Moreover, revenues exceeded the company’s guidance range of $800 million–$840 million. It also surpassed the Zacks Consensus Estimate of $852.5 million.

Revenues by End Markets

The Industrial market generated 43% of Analog Devices’ total revenue (down 2.7% sequentially and 2.5% year over year). This represents a diversified market for the company, including industrial automation, instrumentation, energy, defense and health care segments.

Communications generated 20% of total revenue, down 0.7% sequentially but up 22.4% year over year.

The Automotive segment generated around 16% of Analog Devices’ third quarter revenues, down 2.5% sequentially but up 3.5% year over year.

The Consumer segment, which Analog Devices clubs with its computing and handset businesses, increased 132.5% sequentially and decreased 10.0% year over year. It accounted for 21% of total revenue.

Margins

Pro-forma gross margin was 66.0%, up 23 basis points (bps) sequentially but down 3 bps year over year. The decline was primarily due to higher inventory reserves and lower utilization rates.

Analog Devices reported adjusted operating expenses of $277.7 million, up 2.0% sequentially and 0.9% year over year. Pro-forma operating margin of 34.1% was up 327 bps sequentially but down 10 bps year over year.

Net Profit

On a GAAP basis, Analog Devices recorded a net profit of $230.4 million or 74 cents per share compared with $216.5 million or 68 cents in the year ago quarter.

The company generated adjusted net profit of $258.2 million compared with $245.7 million in the third quarter fiscal of 2015. Pro-forma earnings per share came in at 82 cents compared with 77 cents in the year ago quarter.

Balance Sheet

Analog Devices exited the third quarter with cash and short-term investments of approximately $3.80 billion, up from $3.75 billion in the prior quarter. Accounts receivables were $453 million, up from $399 million in the previous quarter.

Long-term debt was approximately $1.7 billion, resulting in a net cash position of $2.07 billion.

Net cash flow from operations was around $254 million. Analog Devices spent $23 million on share repurchases and $129 million on cash dividends during the third quarter.

Guidance

For the fourth quarter of fiscal 2016, management expects revenues in a range of $910 million to $970 million. The Zacks Consensus Estimate is pegged at $935.3 million. On a non-GAAP basis, the company estimates gross margin of approximately 65.5%, operating expenses to be slightly up sequentially, interest and other expense of about $20 million, tax rate of approximately 12% and earnings per share in a range of 84–94 cents. The Zacks Consensus Estimate is pegged at 88 cents.

On a GAAP basis, the company estimates earnings per share in a range of 78–88 cents.

Our Take

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

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

Analog Devices will acquire Linear Technology (NASDAQ:LLTC) in a cash and stock deal worth $14.8 billion. The acquisition will make Analog Devices an industry leader across a huge range of products, customer breadth and scale. The deal will help it to grow significantly in industrial, automotive, and communications infrastructure markets.

The transaction is anticipated to be immediately accretive to the company’s bottom line results. In addition, the company expects annualized cost synergies of $150 million within the first 18 months post transaction completion.

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 #3 (Hold).

Some better-ranked stocks in the wider technology sector are Silicon Laboratories Inc. (NASDAQ:SLAB) , Charter Communications, Inc. (NASDAQ:CHTR) and Fabrinet (NYSE:FN) , each carrying a Zacks Rank #1 (Strong Buy).