Analog Devices Inc.

 

Analog Devices (ADI) is a semiconductor manufacturer similar to Texas Instruments.  Increasingly we’re in a digital world so analog chips should be going extinct, right?  No, analog chips are required to connect the physical and digital worlds and ADI is focused on helping its customers solve the most difficult challenges in that task.  Over the past 5 years, ADI has doubled revenues, expanded operating margins by >900bps, and almost tripled free cash flow.  ADI acquired Linear Technologies in 2Q17 to further their competitive strengths.  Their main end markets are Industrial (almost half of their business), while Communications, Automotive, and Consumer make up the balance. In FY19, the company is changing revenue recognition when they ship to distributors rather than when distributors sell to end customers (sell in vs sell through). Over a longer period, the accounting change is moot but there can be important distinctions in short time periods. 1H19 results will look soft due some inventory building that took place in 1H18 but those headwinds should turn to tailwinds in 2H18 as they lap the inventory correction and some business softness. Growth drivers in 4G upgrades and initial 5G shipments, continued electrification in automotive and industrial have secular growth drivers with increased content. Also management is talking about opportunities in wearable health technology for monitoring.

Ests:     1Q20   2Q20   FY20    FY21

Revs    1.3b     1.38     5.65b   6.19b

EPS      1.00     1.13     4.78     5.61

 

P= 118.57, Div=2.48, Yield=2.1%, D/C=29%, TTM EPS = 4.85, P/E=24X, FY20 P/E=25X

 

 

1Q20   1.03 vs 1.33 -23%, est 1.00 down from 1.18

  • Feb 19, 2020, P=118.57, TTM EPS=4.85, P/E=24X, FY20 P/E=25X

  • Raised dividend 15% to $2.48, 2.1% yield

  • Revs -15% to 1.3bn, GM 68.5% vs 70.3%, OM 36.9% vs 41.2%, OpInc -24% to 481m

  • Industrial -7% to 684.9m, Comms -31% to 239.9m, Auto -16% to 205.3m, Consumer -20% to 173.4m

  • Inventories `20m q/q, channel inventories also down ~40m, expect smaller reduction in channel in 2Q, “Demand across our end markets has stabilized and is beginning to show signs of improvement”, order trends improved through the quarter, B/B well above 1, so far remained resilient into 2Q but weak trends in China due to coronavirus (assuming minimal February)

  • B2B -15% y/y, industrial better than expected but comms weaker, mgmt. expects 2020 to be bottom of their consumer business. 

  • 2Q Outlook: Revs 1.35b +/- 50m with 70m haircut for potential coronavirus impact, est 1.38bn, EPS -20% to 1.10 +/- .08, est 1.13

  • Revs in line with mgmt. guidance, EPS slightly above the midpoint of their guidance

  • CEO discussed capabilities and opportunities in space especially LEO satellites ground terminals, presenting connectivity, power, and thermal challenges, customers “increasingly turning to ADI as a key system architect” not just a supplier, “cannot be completely replicated by any of our competitors”, see LEOs >4X size of geos in 5 years. Once LEO networks are fully operational, additional opportunities exist “from autonomous driving to telesurgery”

  • Despite continued softness, broad-based trends in industrial, automotive, communications (including optical control systems in data-center), aerospace and defense continue, expect US 5G activity to kick up “at the back end of the year”, LTC power pipeline +40% y/y, ramping products to have meaningful impact on top line in FY21 

4Q19   1.19 vs 1.48 -20%, est 1.22 down from 1.29, FY19 EPS 5.15 vs 5.97

  • Nov 26, 2019, P=112.93, TTM EPS=5.15, P=22X, FY20 P/E=21X

  • Inventory charge impacted GM 140bps and EPS by .05 (due to a comms customer)

  • Revs -6% to 1.44bn, GM 68.4% vs 70.9%, OM 38.8% vs 41.5%

  • Industrial flat at 744.1m, Comm -19% to 260.1m, Auto -8% to 226.1m, Consumer -7% to 212.8m

  • FY19 CFO 2.25bn, FCF 1.98bn, net debt 4.8bn vs 5.5bn

  • Guidance: 1Q Revs 1.3bn +/- 50m (-15% y/y, est 1.43), adj EPS 1.00 +/- .07, -25%, est 1.18

  • Guidance consistent with weakness TXN reported on Oct 22nd after which some people attributed weakness specific to TXN although ADI continues to be valued at a ~10% discount to TXN, Guidance factors softer B2B demand and meaningful reduction in channel inventory with targeted 7-8 weeks of inventory by end of 2Q, 5G demand to be modest for remainder of CY19 with inflection point in 2Q20, Chinese New Year falling on the last week of 1Q20.  

  • Power portfolio from LTC acquisition seeing new revenue streams, pipeline up almost 40% y/y, design wins in 5G infrastructure, data center and automotive with low volume ramps in 2020 with more meaningful ramps in 2021. 

  • 5G opportunity also extends into upgrading the backhaul system driving revenue opportunities for ADI’s optical and point-to-point microwave solutions.

  • Stock ended up about 2% as mgmt hopeful end market demand will improve as early in 2Q20

3Q19   1.26 vs vs 1.51 -16.5%, est 1.22 down from 1.38

  • Aug 21, 2019, P=110.29, TTM EPS 5.47, P/E=20X, FY20 P/E=20X

  • Revs -3% to 1.48bn, GM 70.4% vs 71.2%, OM 40.8% vs 42.4%, OpInc -8.6%, EPS -16.5% due to 14% tax rate vs 5.3%

  • Communications +7% to 316.5m, Industrial -4% to 752.5m, Auto -9% to 227.8m, Consumer -18% to 183.4m, B/B -3%

  • Saw strength in wireline and wireless despite Huawei, also Aerospace and Defence.  

  • 4Q Guidance: Revs 1.45bn +/- 50m (-9%, est 1.49bn, OM 40%, adj EPS 1.22 +/- .07, -21% at midpoint, est 1.29

  • While shipping some product to Huawei, shipments down meaningfully from previously expected mid-single digit range.  4Q B2B ex Huawei would be flat y/y.  

  • Decent results in continued challenging environment, came above the midpoint of their guidance.

  • In comparison, ADI Revs were -3% y/y vs -9% for TXN.  ADI guidance for revs at midpoint -9% y/y and -2% q/q, TXN rev guidance -11% y/y, +3.5% q/q. ADI valued at 20X TTM EPS, TXN at 25X

  • Mgmt discussed EV auto opportunity starting with EV battery manufacturing, reducing costs and shrinking footprint, improving battery quality/safety. Next is battery management systems, products designed for harsh environments, charging stations, 

  • Re 5G base stations, “nobody competes with us at that level” re “trying to put more information density through every radio” if customers want best-in-class performance. Mgmt confident comms will grow in 2020.  

2Q19   1.36 vs 1.50, -9%, est 1.30

  • May 22, 2019, P=99.88, TTM EPS=5.72, P/E=17X, FY19 P/E=17X

  • Revs -2% to 1.53bn, GM 70.6% vs 71.5%, OM 41.5% vs 43.2%

  • Communications +31% to 359.6m, Industrial -6% to 763.5m, Auto -0.5% t0 249.8m, Consumer -32% to 153.7m, B2B grew 3% driven by comms.

  • Guidance: 3Q Revs 1.45bn +/- 50m (-7.6%, est 1.55bn), OM 40.5%, EPS 1.22 +/- .07 (-20%), est 1.38, for 2019 they now expect Consumer -20%, prior expectation was -10 to -20%.

  • Guidance factors Huawei ban, despite short-term geopolitical issues, mgmt. very confident of their positioning, have high share in all the wireless infrastructure manufacturers so are largely customer agnostic and their technology is “highly differentiated”.  

  • stock was recovering nicely until trade negotiations deteriorated and U.S. banned sales of Huawei, chip stocks in general got hit hard, ADI is looking attractively valued again. Continue to generate significant cash, solid debt repayment and balance sheet is sound at 31% debt/cap

  • Over past 12 months, largest comms customers represented only mid-single digit or less as % of total ADI sales.

  • Mgmt sees industrial business stabilized, customers’ inventory very normal, 

  • As mgmt. previously discussed significant opportunities in 5G, this quarter they discussed opportunities in the other 33% of the comms business -wireline (which is very profitable and has grown at a high-single-digit rate over the past 5 years) as carriers deal with challenges of increasing data demand. This also creates power and heat challenges which is a significant opportunity for their power business form Linear, since the acquisition their pipeline in power for wireless market has expanded “very significantly”.

1Q19, 1.33 vs 1.38, -3.6%, est 1.28 down from 1.35

  • Feb 20, 2019, P=104.22, TTM EPS 5.86, P/E=18X, FY19 P/E=19X

  • Raised divided 12.5% to 2.16, raised target for div growth from 5-10% to 7-15%

  • Revs -2% to 1.54bn (+6% on 13 week basis), GM 70.3% vs 71.2%, OM 41.2% vs 42.7%, OpInc -5%, GM softer on lower utilization which should improve in 2Q and rest of the year and better mix

  • On 13 Week basis y/y, Industrial flat to 47%, Auto +6% to 17%, Consumer -15% to 14%, Communications +44% to 22%, Q/Q Industrial -1%, Auto +2%, Comm +8%, Consumer -8%

  • 2Q18 Guidance: Revs 1.5bn +/- 50m, -4% y/y, est 1.52bn, EPS -10% to 1.30 +/- .07

  • Guidance factors slight y/y increase in B2B industrial, auto, and comms led by comms.  

  • Decent results, guidance looks soft but not horrible in this environment although accounting change is part of it, mgmt. thinks if channel inventory was flat, we’d see solid q/q and y/y growth.  Tough comps in 1H as there was some inventory building but 2H will lap the inventory correction and softer business environment 

  • Building some buffer inventories ahead of some closures to drive $100m in cost savings

  • “Investing record levels in R&D to push the boundaries of innovation and expand the breadth and depth of our franchise”, also investing in go-to-market activities to broaden and deepen customer reach and engagements. 

  • Push to digitize factories continues requiring more high-performance signal processing, power management, sensors, and more robust connectivity.

  • In automotive, while unit growth has stalled, incremental electric vehicles will drive growth as they require up to 3X the content as traditional cars.  Fully autonomous cars could require up to 4X the sensors in addition to analog and mixed signal processing, connectivity, and power management.

  • We’re seeing the impacts of 4G upgrades and initial 5G deployments in Communications 

  • Mgmt also discussed healthcare and wearable sensing/monitoring technologies

4Q18   1.55 vs 1.45 est 1.52, FY18 5.94 vs 4.72

  • Nov 20, 2018, P=85.52, TTM EPS = 5.94, P/E=14X, FY19 P/E=15X

  • Revs +3.6% to 1.6bn, GM 71.2% vs 70.9%, OM 43%% vs 42.6%

  • B2B revs grew 13% led by industrial +10% to 788m, and communications +29% to 352m.  Auto +2% to 245m, Consumer -33% to 210.7m

  • Reduced debt by 1.5bn over past year to 6.3bn

  • New rev rec for FY19, recognize revs when ship to distis rather than when distis sell to end customers (sell in vs sell through)

  • 1Q19 Guidance: 13 weeks vs 14 weeks, Revs 1.51bn (-0.6% y/y, but +7% y/y on a normalized sell-through basis, est 1.51bn), GM 70.8%, OM 41%, EPS 1.28 (-3.8% y/y, est 1.35), expect low double-digit normalized growth in B2B led by comms but will look like high-single due to change in rev rec and shorter quarter. This will be the last quarter they give GM and OpEx guidance, still focused on 70% plus GMs and driving OM expansion.  Order activity has stabilized from before, saw an improvement in October vs September (lead times and cancellations are normal). 

  • Mgmt feels they have made great progress on integrating Linear Technologies, R&D teams are synchronized and sales force is working on cross-selling opportunities which mgmt. thinks have doubled since Analyst Day, confident of doubling Linear’s growth rate.  Customers are partnering more deeply to get full benefit of their technology capabilities and product solutions to drive product innovation.  Mgmt sees significant growth with 5G deployment (up to 4X their content with 4G) over the next few years.

  • Decent results and the guidance on a normalized basis is pretty solid, encouraging that mgmt. called out stabilized orders.

3Q18   1.53 vs 1.26, +21%, est 1.46 up from 1.40

  • August 22, 2018, P=95.92, TTM EPS=5.80, P/E=17X, FY 19 P/E=16X

  • Revs +9.7% to 1.57bn, GM 71.2% vs 70.5%, OM 42.7% vs 40.5%

  • Solid cash flow, repaid 430m of debt and achieved their 2X leverage 3 quarters ahead of plan, reinstated share buyback.

  • Industrial +14% y/y to 50% of revs, Comms +27% y/y to 21% of sales, Auto +6% y/y to 16% of sales, Consumer -17% y/y to 13%

  • Mgmt discussed challenges and opportunities of next generation digital enabled factories,

  • 4Q Guidance: Revs 1.53-1.61bn (-0.6% to +4.5%, est 1.55bn), GM 71%, EPS 1.46-1.58 (+0.7-9%), est 1.53

  • Expects low double-digit growth in B2B (Industrial, comms, auto), decline in consumer, growth in comms and auto bring slightly lower GMs to the mix, mgmt. expects more cost savings in late 2020, early 2021 with 2 facility closings.

  • Solid results above top end of guidance, long-term trends driving their B2B business remain in place. Mgmt feels their core industrial growth is 2-3X GDP growth. Starting to see cross-selling opportunities with Linear Technology’s power portfolio.

2Q18   1.45 vs 1.03, est 1.38 up from 1.24

  • Revs +32% to 1.513bn, GM 71.3% vs 69.3%, OM 42.1% vs 37.9%

  • Solid double-digit growth in industrial and communications end markets with strong growth across most applications and geographies

  • Significant opportunities for ADI (and other companies of course including more network virtualization and edge computing) with 5G and evolution to 5G

  • 3Q Guidance: Revs 1.47-1.55bn (+0.6-6.0%), EPS 1.38-1.52, +9.5-20.6%, est 1.40

1Q18   1.33 vs .94 ex .09 tax benefit, est 1.29

  • Raised div 7%

  • Revs +54.3% to 1.52bn, GM 71% vs 66.1%, OM 41.7% vs 35%

  • Solid cash flow and debt reduction, confident they can reduce debt by $1bn annually, will revisit capital allocation strategy as debt/EBITDA hits 2X, expected ~4Q18

  • 2Q Guidance: Revs 1.43-1.51bn ((+18-25%, est 1.44), GM 71-71.5%, OM 41-42.5%, EPS 1.3-1.44 (+26-40%, est 1.24)

  • Solid results and guidance both ahead of estimates, EPS estimate is too low as they are already almost there. Expect FY18 tax rate to rise slightly from 6% to 6-8% then ~12% in FY19

4Q17   1.45 vs 1.05, est 1.37, FY17 EPS 4.72 vs 3.07

  • Revs +54% y/y to 1.54bn (+11.5% pro forma, ADI +14%, LTC +5%), GM 70.9% vs 66.6%, OM 42.6% vs 38.1%

  • Solid results continue across most of their business.

  • Guidance: 1Q18 Revs 1.44-1.54bn with 14 weeks, GM 70.5-71%, EPS 1.20-1.36