Analog Devices's (NASDAQ:ADI) Q3 Sales Top Estimates, Provides Encouraging Quarterly Guidance

Jabin Bastian /
2022/08/17 7:06 am EDT

Manufacturer of analog chips, Analog Devices (NASDAQ:ADI) reported results ahead of analyst expectations in the Q3 FY2022 quarter, with revenue up 76.8% year on year to $3.1 billion. Guidance for next quarter's revenue was $3.15 billion at the midpoint, which is 1.5% above the analyst consensus. Analog Devices made a GAAP profit of $748.9 million, improving on its profit of $503.3 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) Q3 FY2022 Highlights:

  • Revenue: $3.1 billion vs analyst estimates of $3.05 billion (1.7% beat)
  • EPS (non-GAAP): $2.52 vs analyst estimates of $2.43 (3.61% beat)
  • Revenue guidance for Q4 2022 is $3.15 billion at the midpoint, above analyst estimates of $3.1 billion
  • Free cash flow of $1.08 billion, roughly flat from previous quarter
  • Inventory Days Outstanding: 103, up from 95 previous quarter
  • Gross Margin (GAAP): 65.6%, down from 69.4% same quarter last year

“ADI delivered its sixth consecutive quarter of record revenue, fueling adjusted earnings per share to a new all-time high. These results reflect the agility of our hybrid manufacturing model as well as the essential role our high-performance analog, mixed signal, and power portfolio plays across numerous secular growth trends,” 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 strong, averaging 26.3% annually. And as you can see below, last year has been especially strong, with quarterly revenue growing from $1.75 billion to $3.1 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 76.8% revenue growth, beating analyst estimates by 1.7%. This marks 8 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 34.6% YoY next quarter, and Wall St analysts are estimating growth 12.7% 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 103, 3 days below the five year average, showing that despite the recent increase there is no indication of an excessive inventory buildup at the moment.

Key Takeaways from Analog Devices's Q3 Results

With a market capitalization of $93 billion, more than $1.52 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 impressed by the exceptional revenue growth Analog Devices delivered this quarter. And we were also glad to see the improvement in operating margin. On the other hand, it was less good to see the inventory levels increase and gross margin deteriorated a little. Overall, this quarter's results still seemed pretty positive and shareholders can feel optimistic. But the market was likely expecting more and the company is down 2.25% on the results and currently trades at $175 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.