Analog Devices (NASDAQ:ADI) Q4: Beats On Revenue, Next Quarter Sales Guidance Is Optimistic

Jabin Bastian /
2022/11/22 7:07 am EST

Manufacturer of analog chips, Analog Devices (NASDAQ:ADI) announced better-than-expected results in the Q4 FY2022 quarter, with revenue up 38.8% year on year to $3.24 billion. Guidance for next quarter's revenue was $3.15 billion at the midpoint, 3.46% above the average of analyst estimates. Analog Devices made a GAAP profit of $936.2 million, improving on its profit of $75.6 million, in the same quarter last year.

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Analog Devices (ADI) Q4 FY2022 Highlights:

  • Revenue: $3.24 billion vs analyst estimates of $3.15 billion (2.86% beat)
  • EPS (non-GAAP): $2.73 vs analyst estimates of $2.59 (5.51% beat)
  • Revenue guidance for Q1 2023 is $3.15 billion at the midpoint, above analyst estimates of $3.04 billion
  • Free cash flow of $844.8 million, down 21.9% from previous quarter
  • Inventory Days Outstanding: 115, up from 103 previous quarter
  • Gross Margin (GAAP): 65.9%, up from 62.1% same quarter last year

“ADI delivered its seventh consecutive quarter of record revenue, bringing 2022 to a strong close. Our B2B markets of Industrial, Automotive and Communications reached all-time highs, while our Consumer business delivered another year of strong growth. Our team’s execution, combined with strong operating leverage, enabled the most profitable year in ADI’s history,” said Vincent Roche, CEO and Chair.

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 30.1% annually. And as you can see below, last year has been especially strong, with quarterly revenue growing from $2.33 billion to $3.24 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 strong quarter for Analog Devices as revenues grew 38.8%, topping analyst estimates by 2.86%. This marks 9 straight quarters of revenue growth, which means the current upcycle has had a good run, as a typical upcycle tends to be 8-10 quarters.

However, Analog Devices believes the growth is set to continue, and is guiding for revenue to grow 17.3% YoY next quarter, and Wall St analysts are estimating growth 0.45% 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 115, 6 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 Q4 Results

With a market capitalization of $81.9 billion, more than $1.47 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.

We were very impressed by the strong improvements in Analog Devices’s operating margin this quarter. 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 inventory levels increase. Overall, we think this was a strong quarter, that should leave shareholders feeling very positive. The company is flat on the results and currently trades at $166 per share.

Should you invest in Analog Devices 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.