Analog Devices, Inc. (ADI) reported third quarter earnings that beat the Zacks Consensus Estimate by 6 cents. The top line beat Street expectations by 3.7%.

Revenue for the first quarter was $492.0 million, up 3.6% sequentially, down 25.3% year over year and better than management expectations of sequentially flat revenue. Analog products generated nearly  92% of third quarter sales, while DSP accounted for the balance.

The industrial market generated 51% of revenue, a sequential increase of 2.8%. The different markets within industrial had mixed results. Automotive was up 21% sequentially, driven by strength in Europe. Battery monitoring, brake sensing and automotive MEMS revenues were all up sequentially. Auto revenue was down 28% year over year.

Factory automation and instrumentation revenue also increased. The strength in these markets were offset by recession-driven weakness in healthcare and defense.
The communications market generated 26% of revenue, down 8.6% sequentially. Communications infrastructure declined overall, with the strength in networking products completely offset by weakness in base station and optical products. The grant of Chinese 3G licenses in January prompted some enthusiastic buying, which resulted in excess inventory.

The weakness in base station revenue was related to the working down of these inventories. Handset revenue (currently a smaller portion of the communications revenue) also increased, driven by the company’s imaging, auto, RF, power management and high speed Internet connect products.

The consumer segment generated 21%, up 29.6% sequentially. The strength is attributable to strengthening demand, particularly for analog front ends and cameras, HDMI products and MEMS solutions.

Management continued to de-emphasize the computing segment, which generated just 2% of third quarter revenue, a sequential decline of 9.0%.

The revenue by product line was as follows:

The Analog segment generated 92% of revenue, a sequential increase of 3.8%. Within Analog, converters generated 49% of total revenue (up 4.1%), amplifiers 24% (down 3.0%), power management & reference 6% (down 0.7%) and other 13% (up 20.1%). The DSP segment generated 8% of the quarter’s revenue, with almost the entire amount coming from the general purpose category.

The pro forma gross margin for the quarter was 54.5%, down 97 basis points (bps) from the previous quarter’s 55.5%. The main reason for the lower gross margin was the mix of business, as the relatively lower-margin consumer business witnessed the strongest growth, higher-margin industrial increased only slightly and higher-margin communications declined significantly.

Operating expenses of $177.2 million were lower than the previous quarter’s $181.0 million. The operating margin was 18.5%, up 113 bps sequentially from 17.4%. As a percentage of sales, research & development (R&D) expenses were down 103 bps, while selling, general & administrative (SG&A) expenses were down 107 bps.

The pro forma net income was $75.3 million, or a 15.3% net income margin compared to $76.2 million, or 16.1% in the previous quarter and $142.8 million, or a 21.7% net income margin in the prior-year quarter. Fully diluted pro forma earnings per share were 26 cents, exactly equal with the previous quarter and down from the July quarter of last year. The pro forma calculations exclude deferred compensation expenses in the last quarter.

On a fully diluted GAAP basis, the company recorded a net profit of $63.3 million (22 cents per share) compared to $51.8 million (18 cents per share) in the previous quarter and a net profit of $138.6 million (47 cents per share) in the prior-year quarter.

The balance sheet remains strong, with $1.7 billion of cash and short term investments and no debt. The company generated $133.6 million in cash from operations. Inventories decreased 9.4% to $276 million, resulting in annualized turns of 3.2x compared to 2.8x at the end of the second quarter.

Days sales outstanding (DSOs) were up slightly from 44 to 45 days. The company spent $5 million on capex, less than a million on share repurchases and $58 million on cash dividends.

Management provided fourth quarter guidance. Accordingly, revenue is expected to be $510-530 million (up 3.7-7.7% sequentially), gross margin around 55% and other income/expense around -$1 million. The EPS is expected to come in at 24-26 cents based on a share count of 296 million. The tax rate for the remainder of the year is expected to be 20%.
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