ADI’s Fishman remains bullish despite economic uncertainty

NEW YORK— Despite ongoing weakness in its industrial business, Analog Devices Inc. (Norwood, Mass.) is seeing its role change in the sector as its customers are starting to rely on the chip maker to provide systems-level solutions, not just components.

“Some of them are actually asking us to do a lot more integration for them than we've ever done in the past, either for reasons of speed, performance or cost or size,” said Jerald Fishman, president and CEO of ADI, during its earnings conference call with analysts.  

Although it’s a “very slow-building phenomenon,” ADI’s Fishman sees that a growth opportunity for the company, a trend that didn’t exist just five years ago.

Fishman said that there are always pieces of the puzzle missing to fulfill these opportunities, and it will look to fill them with either acquisitions or investment. For instance, ADI earlier this year acquired Multigig Inc. (San Jose, Calif.), a developer of high frequency clock signal technology,  which was natural fit for its converter business. 

Fishman didn’t give details about which product areas or functions the company was looking to fill in its product portfolio. But he did say that he isn’t looking to compete in the “overcrowded” broad-based power management business. ADI is focused on where it is in control of the signal processing bill of materials to add power capability, Fishman said.

For now, however, sales in its industrial segment, which accounts for nearly half of its top line, fell 12 percent in its third fiscal 2012 quarter over a year ago, but remained flat sequentially after posting strong growth in the second quarter. The company said that most of the weakness came from the energy sector, and that it had expected sales in the industrial automation to rebound.

ADI’s largest industrial customers have indicated that while their earlier growth expectations for 2012 have modulated in the past few months, they currently see very little deterioration in their business to date and they don’t expect significant downturn for the balance of the year.

In addition, ADI’s distribution channel, which primarily serves the industrial market, was consistent throughout the quarter and stable in July. ADI saw stronger bookings in July from its distributors, indicating that while they too remain cautious, they don’t see deterioration in their business in the near term.

“These trends are very significant for ADI given the importance of the industrial market to our revenues and to our profits,” Fishman said.

Revenue in its third fiscal 2012 quarter fell 10%, to $683 million, but was up 1% sequentially, which was still slightly lower than expected. Diluted earnings per share of $0.56 was at the midpoint of its earlier guidance.

Revenue in its consumer business was down 19%, while the communications segment’s revenue fell 11%. The only segment to post year-over-year gains was automotive, which saw a 12% jump in revenue.

Sequentially, however, communications was the best performer, growing 9% sequentially as the company’s exposure to wireless base stations in North America, Asia and Japan drove the solid results. Automotive was down 3% as European manufacturers reduced orders on macro concerns. And consumer was up 1%, as strength in portable media was offset by weaker sales of digital cameras.

The company expects the industrial, communications and automotive businesses to remain stable in the fourth fiscal quarter.

ADI is bullish about the outlook in the wireless infrastructure portion of its communications business as 4G LTE rolls out, although 3G will remain the dominant technology for at least another two years. Automotive safety applications, such as roll-over control and radar-based collision avoidance systems, are also expected to be a growth area for ADI.

Fourth-quarter guidance shows revenue estimates of between $685 million and $715 million. A large portion of that growth will be derived from a strong product cycle in its consumer business as it grows its content in mobile devices, particularly MEMS microphones.  The company has increased backlog to meet seasonal demand, as well as respond to a new product cycle; consequently, inventory increased by 3%, or $8 million, with 121 days of inventory on hand. The company expects to bring inventory levels back down to historical levels of 100 to 110 days by the end of its first fiscal 2013 quarter.

As inventories come down, capacity utilization rates will be in the high 60 percent rage compared with approximately 70 percent in the third quarter. As a result, gross margins are expected to remain flat at 65 percent vs. 65.6 percent.

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