Analog Devices on a Hot Streak

{complink 317|Analog Devices Inc.} has finally hit the sweet spot of the market. About four years after it implemented a structural reorganization, the Norwood, Mass.-based analog semiconductor vendor is finding validation with investors — an endorsement CEO Gerald Fishman believes the company has always enjoyed with customers but that Wall Street was slow to give.

It does now. On Feb. 15, several investment firms jacked up their ratings on the company's shares, and one even raised its stock price target to $46 — moments after the shares rocketed to a 52-week high of $41.66, up from the 12-month low of $26.28.

Analysts were responding to the company's strong fiscal 2011 first-quarter results. Revenue for the three months ended Jan. 29, 2011, were up 21 percent, to $728.5 million from $603 million; net income rose to $222.1 million, or 72 cents per share, from $120.5 million, or 40 cents per share, while gross profit margin improved to 66.2 percent from 61.1 percent. The solid performance was further reinforced by an equally positive second-quarter guidance: “$730 million to $760 million, flat to up 4 percent sequentially, and up 9 percent to 14 percent on a year-to-year basis,” Fishman said in a statement.

“We are planning for our gross margin to increase to approximately 66.5 percent of sales based on our current mix assumptions,” Fishman added:

    Order trends were strong in the first quarter. Our book-to-bill ratio, as measured by end customer bookings, was approximately one and our backlog increased slightly. Importantly, orders from our OEM customers increased above fourth quarter levels. These trends, coupled with input from our largest customers that demand is strong across their end markets, give us confidence that the inventory correction is mostly behind us at ADI.

The inventory correction cited by Fishman was preceded by a somewhat acute parts shortage that in 2009 drove OEM procurement specialists crazy trying to secure analog components. In fact, some suppliers recorded lengthy lead-times, and the resulting panic drove double-ordering that eventually led to over-production and, of course, inventory correction once supply caught up — and exceeded — demand. It's a cycle the industry knows very well, and it hurt ADI slightly in its fiscal first quarter, driving down sales sequentially below regular quarter-over-quarter declines, according to David Zinsner, chief financial officer, in an interview.

Zinsner further discussed the company's performance in an interview during which he also addressed current market conditions and the supply chain challenges facing the analog market. Here are excerpts from the interview:

EBN: What would you consider the most important findings from the quarter?

Zinsner: Our industrial business is doing quite well. Early on there was some concern that the industrial sector was overheating and that there was a lot of excess inventory. Clearly, that view did not consider some major trends. One of these was growing spending on infrastructure in China and more broadly in Asia. We build a lot of products that go into traditional industrial systems, but it's always been tied to North American GDP growth and the European market. Now, it's becoming more about world GDP and what's going on in Asia. They are spending on infrastructure, and we are benefiting from that.

EBN: Are you expanding in that part of the world?

Zinsner: We have built up a a pretty significant team in China, and that's helping us to get design wins. But many of our products are not sold in China but getting designed in the US and European markets. We are selling to companies like Siemens and GE, which in turn are selling their systems to the Asia market.

EBN: Your outlook for the fiscal second quarter and the year is very positive. What is this based on?

Zinsner: We talk a lot to customers, and what they tell us is that their expectation for the second quarter is strong and they expect 2011 in general will be a good year.

EBN: Is the outlook limited to the analog market or is it broad based?

Zinsner: It would have to be broad-based. We are not so unique that we are going to be significantly different than the rest of the broader semiconductor space. The expectation is that 2011 will be a good year for industrial customers; we are expecting the consumer sector to come back in the second quarter.

5 comments on “Analog Devices on a Hot Streak

  1. SunitaT
    February 21, 2011

    Its quite encouraging to see Semiconductor companies coming out with strong quarterly numbers.

    Zinsner says “We have built up a a pretty significant team in China and that's helping us to get design wins” – what does this exactly means. Does it mean chinese factor gives extra confidence to the customers ?

  2. Mydesign
    February 22, 2011

       Barbara, good and informative interview. Finally Zinsner is also realized that, they cannot pull much of their products in Chinese market.  Chinese government policy is like that, they invite all companies as a part of global investment with red carpet and other single window system etc, but they never entertain to sell those products in Chinese market. They want to promote much Chinese local products. Now a day almost all companies are thinking about, moving their foot print to Northern America states, in order to grab the advantage of GDP growth in N. American states. Zinsner can also think in similar directions.

        Happy to see that, more semiconductor companies are coming up with good news in 2011, in terms of profit and turn over. As a close watcher, am expecting some positive news for the year end in totally.

  3. bolaji ojo
    February 22, 2011

    Tirlapur, He was referring here to China's growing role in the electronics industry and the country's huge spending on infrastructure and other industrial projects. Any company that wants to participate in China's growth should have a presence in the country whether it sells directly to OEMs or through distributors.

  4. elctrnx_lyf
    February 22, 2011

    Analog devices has certainly made sure that they will produce the positive results. AD is clearly becoming much matured analog company with their high end data conversion products used in all telecom equipments. Their establishments in china also helping them in huge way since many of the OEM's are also having their design centres in developing countries.

  5. Barbara Jorgensen
    February 22, 2011

    I've always had a lot of respect for ADI. Talk about management stability–it's been Ray or Jerry at the helm for how long? And ADI always comes out of a downturn swinging for the fences.

    “We are not so unique that we are going to be significantly different than the rest of the broader semiconductor space.”

    I think that goes beyond just the market–I think ADI always focuses on what's going to make it unique in the analog space.


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