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Analog Devices (NASDAQ:ADI) Reports Q4 In Line With Expectations But Quarterly Guidance Underwhelms

StockStory - Tue Nov 21, 2023

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Manufacturer of analog chips, Analog Devices (NASDAQ:ADI) reported results in line with analysts' expectations in Q4 FY2023, with revenue down 16.4% year on year to $2.72 billion. On the other hand, next quarter's revenue guidance of $2.5 billion was less impressive, coming in 7.3% below analysts' estimates. Turning to EPS, Analog Devices made a non-GAAP profit of $2.01 per share, down from its profit of $2.73 per share in the same quarter last year.

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Analog Devices (ADI) Q4 FY2023 Highlights:

  • Revenue: $2.72 billion vs analyst estimates of $2.72 billion (small beat)
  • EPS (non-GAAP): $2.01 vs analyst expectations of $2.02 (small miss)
  • Revenue Guidance for Q1 2024 is $2.5 billion at the midpoint, below analyst estimates of $2.70 billion
  • EPS (non-GAAP) Guidance for Q1 2024 is $1.70 at the midpoint, below analyst estimates of $1.90
  • Free Cash Flow of $710.9 million, down 13.1% from the previous quarter
  • Inventory Days Outstanding: 140, up from 140 in the previous quarter
  • Gross Margin (GAAP): 60.6%, down from 66% in the same quarter last year

Founded by two MIT graduates, Ray Stata and Matthew Lorber in 1965, Analog Devices (NASDAQ:ADI) is one of the largest providers of high performance analog integrated circuits used mainly in industrial end markets, along with communications, autos, and consumer devices.

Analog Semiconductors

Demand for analog chips is generally linked to the overall level of economic growth, as analog chips serve as the building blocks of most electronic goods and equipment. Unlike digital chip designers, analog chip makers tend to produce the majority of their own chips, as analog chip production does not require expensive leading edge nodes. Less dependent on major secular growth drivers, analog product cycles are much longer, often 5-7 years.

Sales Growth

Analog Devices's revenue growth over the last three years has been very strong, averaging 33.3% annually. But as you can see below, its revenue declined from $3.25 billion in the same quarter last year to $2.72 billion. Semiconductors are a cyclical industry, and long-term investors should be prepared for periods of high growth followed by periods of revenue contractions (which can sometimes offer opportune times to buy).

Analog Devices Total Revenue

This was a slow quarter for the company as its revenue dropped 16.4% year on year, in line with analysts' estimates. This could mean that the current downcycle is deepening.

Analog Devices's revenue growth has decelerated over the last three quarters and its management team projects growth to turn negative next quarter. As such, the company is guiding for a 23.1% year-on-year revenue decline while analysts are expecting a 10.4% drop over the next 12 months.

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Product Demand & Outstanding Inventory

Days Inventory Outstanding (DIO) is an important metric for chipmakers, as it reflects a business' capital intensity and the cyclical nature of semiconductor supply and demand. In a tight supply environment, inventories tend to be stable, allowing chipmakers to exert pricing power. Steadily increasing DIO can be a warning sign that demand is weak, and if inventories continue to rise, the company may have to downsize production.

Analog Devices Inventory Days Outstanding

This quarter, Analog Devices's DIO came in at 140, which is 25 days above its five-year average, suggesting that the company's inventory levels are higher than what we've seen in the past.

Key Takeaways from Analog Devices's Q4 Results

Sporting a market capitalization of $91.6 billion, more than $958.1 million in cash on hand, and positive free cash flow over the last 12 months, we believe that Analog Devices is attractively positioned to invest in growth.

While the quarter itself was ok, the big disappointment was around next quarter's guidance. The company's outlook for both revenue and adjusted EPS came in well below expectations. The company is down 2.9% on the results and currently trades at $178.5 per share.

Analog Devices may have had a tough quarter, but does that actually create an opportunity to invest right now? When making that decision, it's important to consider its valuation, business qualities, as well as what has happened in the latest quarter. We cover that in our actionable full research report which you can read here, it's free.

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The author has no position in any of the stocks mentioned in this report.

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