Analog Devices Beats Again

Analog Devices’ (ADI: 29.75 +0.18 +0.61%) fiscal first quarter results beat the Zacks Consensus estimate by 7 cents. Shares were up over 4% in response to the news.
 
Revenue
 
Revenue of $603.0 million was up 5.5% sequentially and 26.5% year over year. The sequential strength was driven by all markets except consumer, which saw some seasonal softness. The increase from the year-ago quarter reflects a higher level of business, particularly in the automotive and consumer segments.
 
Revenue by End-market
 
The industrial market generated 43% of total revenue (up 16.3% sequentially), driven by broad-based growth across applications, such as instrumentation and process control, test equipment, healthcare, defense and aerospace. Beginning this quarter, automotive revenue is being broken out separately.
 
The automotive segment generated 12% of revenue, growing 4.6% sequentially. The main drivers here continue to be increasing electronic content per vehicle, especially in the areas of infotainment and safety. The company also benefited from some inventory replenishment in the last quarter.
 
Communications generated 22% of total revenue, up 11.8% sequentially. Management stated that although wireless remains the bulk of revenues in this segment, wireline continues to demonstrate steady growth. Within wireless, the major driver in the last quarter was 3G base station deployment all over the world, due primarily to the need for deeper penetration in developing countries and for greater data volume transmission in developed countries.
 
Consumer generated 20% of revenue. Segment revenue was down 17.6% sequentially, due to normal seasonal softness following the holiday season. Revenue exceeded the year-ago quarter by 53.5%.
 
Computing accounted for the remaining 3% of revenue, the 19.4% sequential increase is attributable to the ongoing recovery in the market.
 
Revenue by Product Line
 
Both analog and DSP products grew in the last quarter, albeit at a slower rate than in the Oct 2009 quarter. Converters grew the strongest (up 19.5% sequentially), followed by amplifiers/RF, which grew 15.6%, power management and referencing 7.7% and DSPs 2.7%.  The product lines generated 53%, 25%, 6% and 9% of revenue, respectively. The balance came from other analog products, which were down 49%.
 
Margins
 
The pro forma gross margin was 61.4%, up 470 basis points (bps) from the previous quarter’s 56.7%. The gross margin improvement has been going on for a couple of quarters now and it is mainly driven by higher volumes, which resulted in better utilization rates, a more favorable mix of business, as well as the effect of management’s decision to exit businesses that did not yield sufficient profits.
 
Operating expenses of $192.7 million were higher than the previous quarter’s $183.0 million. However, the operating margin increased 476 bps sequentially to 29.4%. The improvement was mainly due to the higher gross margin, helped by a 17 bp decline in R&D costs as a percentage of sales and partially offset by a 12 bp increase in SG&A as a percentage of sales.
 
The pro forma net income was $136.1 million, or a 22.6% net income margin compared to $105.6 million, or 18.5% in the previous quarter and $66.3 million, or a 13.9% net income margin in the prior-year quarter. The fully diluted pro forma earnings per share were $0.45 compared to $0.36 in the previous quarter and $0.23 in the Jan quarter of last year. The pro forma net income calculations exclude restructuring charges but include stock-based compensation expenses in the last quarter.
 
Including restructuring expenses, the fully diluted GAAP income was $120.5 million or $0.40 per share compared to $105.6 million or $0.36 in the previous quarter and $24.9 million, or $0.09 in the year-ago quarter. The GAAP numbers in the year-ago quarter include a $41 million restructuring charge.
 
Balance Sheet
 
Inventories decreased 3.9% to $243 million, resulting in annualized inventory turns of 3.8X compared to 3.9X at the end of the fourth quarter. Days sales outstanding (DSOs) were down from 48 to 47. Cash generated from operations was around $214 million. The company spent $17 million on capex and $59 million on cash dividends ($0.20 per share) in the last quarter.
 
Guidance
 
The industrial and communications markets are expected to remain strong in the fiscal second quarter and consumer flattish sequentially. Therefore, revenue is expected to be up 5-8% sequentially ($635-650 million) and up 35% from the year-ago period. The gross margin is expected to be 62-63%, operating margins 29-31%, resulting in EPS from continuing operations of $0.48 to $0.51.