EUR 850.00 For Business Accounts Only

Morningstar | Analog Devices Communicates Content Growth in 4Q Results; Maintain $96 FVE

Analog Devices rounded out the year with robust results, coming in slightly better than our projections due to strong demand in instrumentation, healthcare, and aerospace and defense, which benefited the communications and industrial sectors. While business in China was a headwind due to decelerating demand in factory automation, and uncertainty lies ahead concerning trade wars between the U.S. and China, we continue to believe that ADI is well-positioned to profit from secular tailwinds in 5G communications, as well as rising chip content per car and industrial devices. We are maintaining our $96 fair value estimate for wide-moat ADI.

Revenue in the October quarter was $1.6 billion, up 4% year over year, up 2% sequentially, and at the high end of the firm’s forecast of $1.53 billion-$1.61 billion. Communications continued to bring the most revenue growth, up 29% year over year and 8% sequentially. Revenue from 4G was boosted as customers deploy multiple input, multiple output (MIMO) antenna technology on an increasingly large scale and ADI continues to add content gains. Overall, ADI expects to have 4 times more content as 5G deployment accelerates. Industrial saw revenue growth of 10% year over year while automotive revenue grew by 2% year over year due to popularity in cabin electronics, especially audio processing. Consumer continued its downward spiral as revenue decreased by 33% year over year, though the sales decline at Apple was not as severe as projected.

For the January quarter, ADI will report revenue on a sell-in basis, as dictated by new accounting rules, versus prior periods where the company reported sales on a sell-through basis to end customers. Further, ADI's January 2018 quarter a year ago was a 14-week period versus 13 weeks in the upcoming January 2019 period (and most other quarters. In this context revenue is forecast to be $1.46 billion-$1.56 billion. At the midpoint of $1.51 billion, sales would be down about 4% sequentially and up only 1% year over year. Yet after considering the aforementioned adjustments, ADI's guidance represents 4% year-over-year growth on a sell-in basis and 7% growth on a sell-through basis. Further, the firm's core business-to-business end markets would see high-single-digit growth on a sell-in basis and up low double digits on a sell-through basis, which we think would be commendable in light of a sluggish semiconductor demand environment. Adjusted gross margins are guided to come in at 70.8%, lower sequentially due to product mix and holiday shutdowns.

Overall, ADI saw some weakness in China but didn't hint at a full-blown panic among customers. The firm specifically swatted away a question about whether 5G communications chip demand was being pulled in ahead of additional Chinese tariffs. The China trade war bears watching, particularly in the automotive and industrial sectors, but we still think ADI is well-positioned to prosper from rising chip content in autos and industrial devices in the years ahead.