Finally, Investor Validation Arrives for Analog Devices

Investor validation has been slow in coming for the strategic and product reorganization {complink 317|Analog Devices Inc} began implementing about three years ago.

On Tuesday, Nov. 23, however, the sweet scent of shareholder affirmation rose strongly even in a tumultuous market, pushing up the analog semiconductor company's stock price to $36.07, its highest level in more than two years. The stock later slipped 1 percent amid a general sell-off.

Analog Devices shares have now risen 37 percent in the last year, and, in my opinion, they still have solid legs to climb higher in the months ahead. While sales may weaken sequentially in the December and March quarters, I fully expect Analog Devices to remain the must-watch stock among its peers.

Its guidance for the December quarter is for some seasonal weakness with customers shifting orders around. Yet, “2011 will be a solid year, according to indications from our customers,” CFO David Zinsner said in an interview. I concur. I also believe investors will reward the company with even higher valuation in 2011.

Here's why: Analog Devices is one of the premier plays in the analog IC market, but beyond the strength of its sector the company has implemented some fundamental changes to its operations that in the future will help it maintain margin growth, steady sales improvement, and rising goodwill for dependable supplies. In a sector marked over the last two years by fears of shortages, extended lead times, and component allocations, the ability to guarantee supply to harried OEMs cannot be overemphasized.

In the fiscal fourth quarter ended Oct. 30, Analog Devices' gross profit margin swelled to 67 percent, from 56 percent in the year-ago quarter. Fiscal 2010 gross profit margin also rose about 10 percentage points to 65.2 percent from 55.5 percent in fiscal 2009. The increase came on a 37 percent surge in revenue to $2.76 billion, the highest the company has posted in at least five years. Finally, it seems, Analog Devices has all its engines firing at full blast.

“Driving our success in the fourth quarter and throughout the entire fiscal year is our operational model, which we structured to get the upside while simultaneously protecting against the downside,” said Jerald Fishman, CEO of Analog Devices, during a conference call. “Our new organizational structure increased our alignment with customers; heightened our understanding of their applications and their systems architecture; enabled us to provide much more complete solutions; and helped us further refocus on our investments on those products and those markets where our innovations have sustainable value and we can get paid for them.”

The seeds of the company's past and future successes are embedded in Fishman's summary. Analog Devices has been focusing on proprietary technology and also on production efficiency. Zinsner said the company kept lead times at six weeks to eight weeks over the last quarters even as some competitors struggled with more extended delivery times. As the high-tech sector heads into the seasonally weaker first quarter, and with visibility still cloudy due to wariness on the part of OEMs, Analog Devices will “not panic in any way,” he asserted.

To protect its margin in consumer, Analog Devices, according to Zinsner, will be aligning itself even more closely with partners “that are doing advanced technology products and we can earn the margins that we get for industrial and communication infrastructure products.”

It's not unlikely that Analog Devices, like its competitors, will come up against a market downturn in the future, a development that could hurt carefully laid out plans. By my reckoning, however, Analog Devices' track record of efficient delivery even when demand and supply were out of sync has given it extra points with customers. The coming challenge the company faces is ensuring it does not mess up that carefully cultivated image.

“We will bask a bit in the glory of what we did over the last year,” quipped Zinsner, before returning almost as quickly to the cautious and deliberate tone that has characterized Analog Devices' operation over the years. “But we will still be tight with operating expenses and committed to efficient production, because once lead times get squeezed, things spiral out of control.”

12 comments on “Finally, Investor Validation Arrives for Analog Devices

  1. SP
    November 23, 2010

    Analog devices has undoubtedly created a strong market in analog IC domain. In some applications they just dont have any competition.

  2. eemom
    November 24, 2010

    Kudos to Analog Devices for closing out 2010 with not only high revenue growth but also higher overall gross profit.  After the entire Semiconductor market saw a huge decline in 2008 and early 2009, according to Forward Concepts, the market recovered nicely in 2010 with an estimated growth of over 30%.  What Analog Devices has that separates it from its competition is that they figured out a long time ago how to sustain high profit margins and not to cut into their profits in exchange for increased revenue.  They have been very methodical in their strategy and often re-organize internally to align themselves strategically with the everchanging marketplace.

  3. Mydesign
    November 26, 2010

       Analog devices are playing a major role in semi conductor industry. When ever and who ever thinks about semiconductors, the first name comes to their mind is Analog devices and more over they are trying to keep up there name up. When we are looking to the history of Analog devices, we can see that they had built up this role by gradual evolution process. That means starting from a single chip or semi conductor piece they expand the wings globally, with variety of products. They are also making sure about their market presence by sponsering different events, seminars, workshop etc. They had build up the trust that, there products are trustable and reliable. That’s why they have gone much further than the competitors. Hope they will continue the journey well in coming years also.

  4. eemom
    November 26, 2010

    Analog has managed to sustain sales propreitary products without encountering competition in those markets.  Its those products that have identified them (and continue to do so) as a leader in the analog market. 

  5. Parser
    November 26, 2010

    While Analog Devices has some unique products there is a portion of it, which directly competes with Linear Technology, TI and some others. From a business perspective any other company can do the same what Analog Devices is doing. Buzzwords “not panic”, “align strategically” and “keep the cost down” are standard business practices. What are the subtle differences that make them better than others? 

  6. Backorder
    November 27, 2010

    I find it strange with so much emphasis on 'success' of ADI and it leaving its competitors behind. Well, considering it operates in the same market as some companies as TI, I dont really consider their performance a lot better against some of these guys. Of course, ADI has done well but do they have the biggest share in Analog market yet? I dont think so.

  7. bolaji ojo
    November 27, 2010

    You asked: What's unique about Analog Devices? Analog Devices isn't unique but it is different among its analog peers. In future columns, I will expand further on how Linear Technology and TI, the two companies you mentioned, are also distinguishing themselves. It is a highly competitive market and “standing still” even when performing well is not a recipe for continued success. Each of these companies is different in its own ways.

    Right now, though, I will rate ADI at the top of the pack with TI and Linear not too far behind. In terms of year over year fiscal sales growth, ADI is ahead at 37 percent versus 34 percent for TI and 21 percent for Linear. Fiscal 2008 was a strong year for all these companies but only ADI has in its just-ended fiscal year exceeded 2008 level; estimates for TI indicate it will be close to or slightly exceed 2008 numbers in 2010. In 2011, though, TI will certainly set new sales records.

    Analog Devices in the last year did not miss a beat when demand soared, its lead time did not stretch out much and the company embarked upon a reorganization at the top of its game three years ago. It also shifted emphatically into higher value products. These are moves one should applaud especially as they positioned the company for margin expansion (and protection) in a fast-commoditizing market.

    TI had some glitches during the same period but the company has recovered, its lead times are shrinking and it has gone on a fab-expansion strategy that is expected to help it maintain a leading role in the market. TI's lead times problem is fading and the company, strategically, has acquired fab equipment at bargain prices.

    Linear Technology has a distinct supply chain strategy, one it used effectively in the last market upheaval, to manage supplier demand without running out of stock.

    Investors love the three companies and I think they'll be loving them even more in the months ahead.

  8. itguyphil
    November 28, 2010

    Aren't most analog devices phased out by now? With the proliferation of digital mediums in almost all industries, is analog truly still a factor anymore? If so, for what industries?

  9. eemom
    November 28, 2010

    Analog chips are needed to convert digital signal into real world analog and visa versa.  The more products need to interact directly with the user, the more analog products are needed. 

  10. hwong
    November 30, 2010

    We always need to find a way to interface the analog world. But those analog circuits can be designed with purely digital circuits. Then we process the analog signals in discrete time domain to take advantage of the robustness of digital circuits. ADI is really good in terms of doing that.

  11. itguyphil
    November 30, 2010


    THanks for the breakdown. I made the mistake of thinking 'end product' and not about the process. Analog will always be around for the signal processing, etc (the gruntwork).

  12. Backorder
    November 30, 2010

    Analog remains on the board. There are tens of analog chips for every cental processing chip on any board! However, as you mention more and more analog peripherals are now being added on the same silicon as the processors and hence from the outside it might seem that we are doing away with the analog but nothing could be further from the truth.

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