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Analog Devices (NASDAQ:ADI) Q1 Sales Beat Estimates, Provides Optimistic Guidance For Next Quarter


Kayode Omotosho /
2022/02/16 7:11 am EST
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Manufacturer of analog chips, Analog Devices (NASDAQ:ADI) reported Q1 FY2022 results beating Wall St's expectations, with revenue up 72.2% year on year to $2.68 billion. Guidance for next quarter's revenue was $2.8 billion at the midpoint, 5.6% above the average of analyst estimates. Analog Devices made a GAAP profit of $280 million, down on its profit of $388.5 million, in the same quarter last year.

Is now the time to buy Analog Devices? Access our full analysis of the earnings results here, it's free.

Analog Devices (ADI) Q1 FY2022 Highlights:

  • Revenue: $2.68 billion vs analyst estimates of $2.6 billion (2.89% beat)
  • EPS (non-GAAP): $1.94 vs analyst estimates of $1.79 (8.62% beat)
  • Revenue guidance for Q2 2022 is $2.8 billion at the midpoint, above analyst estimates of $2.65 billion
  • Free cash flow of $745.2 million, roughly flat from previous quarter
  • Inventory Days Outstanding: 69, down from 90 previous quarter
  • Gross Margin (GAAP): 52.2%, down from 67% same quarter last year

“ADI delivered its fourth consecutive quarter of record revenue with momentum across all end markets and geographies. The growing demand for our solutions and our commitment to operational excellence enabled adjusted gross margin, operating margin and EPS to achieve new highs,” said Vincent Roche, President and CEO.

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.

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. The biggest secular growth drivers currently are the adoption of electric vehicles, 5G networks and Internet of Things connectivity, and demand for chips that reduce power consumption. 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 unremarkable, averaging 12.7% annually. But as you can see below, last year has been stronger for the company, growing from quarterly revenue of $1.55 billion to $2.68 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 fantastic quarter for Analog Devices with 72.2% revenue growth, beating analyst estimates by 2.89%. This marks 6 straight quarters of revenue growth, implying we are mid-cycle for Analog Devices, as a typical upcycle tends to last 8-10 quarters.

Analog Devices believes the growth is set to continue, and is guiding for revenue to grow 68.5% YoY next quarter, and Wall St analysts are estimating growth 33.5% over the next twelve months.

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Product Demand & Outstanding Inventory

Days Inventory Outstanding (DIO) are an important metric for chipmakers, as it reflects the capital intensity of the business 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 inventory days came in at 69, 40 days below the five year average, showing no indication of an excessive inventory buildup at the moment.

Key Takeaways from Analog Devices's Q1 Results

Sporting a market capitalization of $85.1 billion, more than $1.79 billion in cash and with positive free cash flow over the last twelve months, we're confident that Analog Devices has the resources it needs to pursue a high growth business strategy.

We were very impressed by the strong improvements in Analog Devices’s inventory levels. And we were also excited to see that earnings outperformed Wall St’s expectations. On the other hand, it was less good to see the pretty significant deterioration in gross margin. Zooming out, we think this impressive quarter should have shareholders feeling very positive. The company is up 2.35% on the results and currently trades at $165.82 per share.

Analog Devices may have had a good quarter, so should you invest right now? It is important that you take into account its valuation and business qualities, as well as what happened in the latest quarter. We look at that in our actionable report which you can read here, it's free.

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