Analog Devices’ (ADI) fiscal fourth quarter results beat the Zacks Consensus estimate by 14 cents. Revenue beat by 9.3%. 

Revenue 

Revenue of $571.6 million was up 16.2% sequentially and down 13.5% year over year. The sequential strength was driven by broad-based recovery in all except the communications end-market. The decline from the year-ago period was much lower than in the preceding three quarters. Orders were up 17% sequentially, resulting in a stronger backlog. 

Revenue by End Market 

The industrial market generated 52% of total revenue (up 16.8% sequentially). Automotive and healthcare were the strongest subsegments, growing 37% and 17%, respectively. Battery monitoring, breaks sensing and MEMS products were the primary drivers of automotive revenue. Healthcare benefited from the market recovery. 

Other industrial products, such as process control, factory automation and instrumentation were up 14%. Consumer was the the second largest segment in the last quarter with a 25% revenue share. Segment revenue was up 38.5% sequentially, driven by normal seasonal strength ahead of the holiday season. Revenue was still lower than in the year-ago period. 

Communications dropped to the third position, with a 21% share of total revenue, down 2.5% sequentially. Although 3G deployment in developed countries remained strong, this was offset by delayed GSM deployment in emerging markets. The optical, networking and wired infrastructure markets remained strong. 

There was inventory rebalancing at the largest OEM infrastructure customers. Computing accounted for the remaining 2% of revenue, the 8.3% sequential increase attributable to the ongoing recovery in the market. 

Revenue by Product Line 

Both analog and DSP products grew double-digits sequentially. Power management, referencing and other products witnessed the strongest growth within analog, converters increased double-digits, while amplifiers witnessed the lowest growth (up 6.9% sequentially). Converters and amplifiers generated 47% and 22% of total revenue, respectively. General purpose DSPs generated around 9% of revenue, a sequential increase of 28.2%. 

Operating Performance 

The pro forma gross margin for the quarter was 56.7%, up 217 basis points (bps) from the previous quarter’s 54.5%. Volume increases drove utilization rates, which helped cost absorption in the last quarter. Mix was negative in the quarter, as the increase in high-margin industrial revenue was less than the increase in lower margin consumer revenue. Operating expenses of $183.0 million were higher than the previous quarter’s $177.2 million. 

However, the operating margin increased 618 bps sequentially to 24.7%. All items of cost declined as a percentage of sales, with R&D declining the most (down 249 bps), followed by COGS (down 217 bps) and then SG&A (down 151 bps). The pro forma net income was $118.2 million, or a 20.7% net income margin compared to $77.5 million, or 15.7% in the previous quarter and $160.7 million, or a 24.3% net income margin in the prior-year quarter. 

Fully diluted pro forma earnings per share were $0.40 compared to $0.26 in the previous quarter and $0.55 in the Oct quarter of last year. The pro forma calculations exclude deferred compensation expenses in the last quarter. Including share-based compensation, the fully diluted GAAP income was $105.6 million or $0.36 per share compared to $65.5 million or $0.22 per share in the previous quarter and $144.3 million, or $0.49 per share in the year-ago quarter. 

Balance Sheet 

Inventories decreased 8.3% to $253 million, resulting in annualized inventory turns of 3.9x compared to 3.2x at the end of the third quarter. Days sales outstanding (DSOs) were up from 45 to 48 days. Cash generated from operations was around $163 million. The company spent $16 million on capex and $58 million on cash dividends in the last quarter. 

Guidance 

Management expects the industrial and communications markets to be flat sequentially in the first quarter of fiscal year 2010. Consumer is expected to decline sequentially, in line with normal seasonal trends. Therefore, revenue is expected to be flattish sequentially and up 20% from the year-ago period. The gross margin is expected to be 58-58.5%, operating expense flat sequentially, resulting in EPS from continuing operations (excluding restructuring charges) of $0.36 to $0.37. The tax rate for the year is expected to be 19-20%.
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