Analog Devices (NASDAQ:ADI) Q2: Beats On Revenue But Quarterly Guidance Underwhelms

Radek Strnad /
2023/05/24 7:10 am EDT

Manufacturer of analog chips, Analog Devices (NASDAQ:ADI) reported Q2 FY2023 results that beat analyst expectations, with revenue up 9.79% year on year to $3.26 billion. However, guidance for the next quarter was less impressive, coming in at $3.1 billion at the midpoint, being 1.81% below analyst estimates. Analog Devices made a GAAP profit of $977.7 million, improving on its profit of $783.3 million, in the same quarter last year.

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Analog Devices (ADI) Q2 FY2023 Highlights:

  • Revenue: $3.26 billion vs analyst estimates of $3.21 billion (1.77% beat)
  • EPS (non-GAAP): $2.83 vs analyst estimates of $2.76 (2.67% beat)
  • Revenue guidance for Q3 2023 is $3.1 billion at the midpoint, below analyst estimates of $3.16 billion
  • Free cash flow of $1.23 billion, roughly flat from previous quarter
  • Inventory Days Outstanding: 134, up from 123 previous quarter
  • Gross Margin (GAAP): 65.7%, in line with 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.

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 35.1% annually. And as you can see below, last year has been especially strong, with quarterly revenue growing from $2.97 billion to $3.26 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

While Analog Devices beat analysts' revenue estimates, this was a very slow quarter with just 9.79% revenue growth. This was the third straight quarter of decelerating growth for Analog Devices, potentially indicating a coming cycle downturn.

Analog Devices's revenue growth has decelerated for the last three quarters and the company expects growth to turn negative next quarter guiding to a 0.32% year on year decline, while analysts are estimating a NTM revenue decline of 1.59%.

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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 134, 22 days above the five year average, suggesting that that inventory has grown to higher levels than what we used to see in the past.

Key Takeaways from Analog Devices's Q2 Results

With a market capitalization of $95.1 billion, more than $1.18 billion in cash and with free cash flow over the last twelve months being positive, the company is in a very strong position to invest in growth.

It was good to see Analog Devices outperform Wall St’s expectations this quarter. On the other hand, it was unfortunate to see that the revenue guidance for the next quarter missed expectations and inventory levels increased. Overall, this quarter's results could have been better. The company is down 4.59% on the results and currently trades at $179.3 per share.

Analog Devices may have had a tough quarter, but does that actually create an opportunity to 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.