(ADI) Analog Devices Earnings Preview

Analog Devices, Inc. (ADI) is scheduled to announce its fiscal third-quarter 2012 results on August 21. We have seen downward movements in analyst estimates in the build-up to the release.

Prior-Quarter Synopsis

Analog Devices’ second quarter 2012 pro forma earnings beat the Zacks Consensus Estimate by a couple of cents on the back of stronger-than-expected revenue and margins.

Revenue in the quarter was $675.1 million, up 4.2% sequentially, particularly attributable to strong sales across a wide range of industrial and communications infrastructure applications. The consumer segment performed poorly in the quarter but orders started strengthening toward the end of the period, indicating improving trends that should lead to stronger revenues going forward.

Gross margin of 65.2% was up sequentially, driven by higher utilization rates and a stronger mix of high-margin industrial and communications infrastructure products.

Third Quarter Guidance

Management expects third quarter revenue between $682 million and $702 million (a 1–4% sequential increase), operating expenses of around $231 million and diluted earnings per share (EPS) of 54 to 58 cents.

Agreement of Analysts

For the third quarter, one estimate out of 18 total was revised downward in the last 30 days. For fiscal 2012, two estimates declined in the same amount of time.

The majority of analysts expect a decent third quarter with revenue in line with the Street consensus estimates of $692 million. However, they expect a weak fourth quarter guidance due to the sluggish macro environment.

The analysts expect to see strength in the Communications and Consumer end markets. They contend that 3G/4G deployments in China and North America will drive the company’s future revenue growth. They also believe that wireless infrastructure is another area of revenue growth with strength in wireless base station build-outs owing to continued expansion into China, Europe and North America.

However, a handful of analysts expect a weak quarter due to uncertainty in the current environment. They expect weak demand  particularly in the industrial and automotive end markets, which together comprise roughly 65% of Analog’s total revenue.

Magnitude of Estimate Revisions

In the past 30 days, there was no change in the Zacks Consensus Estimate for the third quarter but the estimate for fiscal 2012 dropped by a penny to $2.15.

Over the 90-day period, the Zacks Consensus Estimate fell 2 cents to 56 cents for the third quarter and 3 cents to $2.15 for fiscal 2012.

The weak demand environment and lower-than-expected guidance seem to have prompted the reduction in estimates.

Our Recommendation

Analog Devices is a leading supplier of analog and DSP integrated circuits. We remain encouraged by the company’s dominant position in many of its product segments, and meaningfully improved gross and operating margin structures.

However, we do not expect Analog Devices to see a strong third quarter due to the tough macroeconomic environment and softness within the industrial infrastructure markets.

Analog Devices, which competes with other large analog players such as Intersil Corporation (ISIL), Linear Technology Corp (LLTC), Maxim Integrated Products (MXIM) and Texas Instruments (TXN), holds a Zacks #3 Rank that translates into a short-term ‘Hold’ rating.


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