When you're swimming against the stream and still making good headway, you know you're doing something right. That's how Analog Devices (NYSE: ADI) is doing it these days.
Analog CEO Jerald Fishman noted that the product mix he is pushing out at the moment contains more of the low-margin chips that go into cars and consumer products, and comparatively fewer high-margin industrial parts. Even so, the company collected gross margins of 56.3%, or 220 basis points above the previous quarter.
That might sound like an impossible trick, performed with smoke and mirrors, but margins tend to expand when a chip maker's order flows pick up steam. Unlike fabless chip designers like NVIDIA (Nasdaq: NVDA) or Atheros Communications (Nasdaq: ATHR), Analog runs factories of its own and has to absorb the fixed costs of running those plants through thick and thin.
Ripping a page from rival Texas Instruments (NYSE: TXN), Analog does source about one-third of its silicon chips through third-party manufacturers, with most of that business going to Taiwan Semiconductor Manufacturing (NYSE: TSM), but that still leaves a large chunk of manufacturing capacity that only makes money if it's in use.
And ADI's sales did flow freely in the fourth quarter, to the tune of $572 million or a 16% sequential increase. The two-punch combo of higher sales and wider margins trickled down to the bottom line, where earnings per share expanded from $0.22 last quarter to $0.36 this time.
Analog has a growing backlog of orders, and Fishman sees margins growing again in the next quarter. Industrial sales should improve, but the "cash for clunkers" program is over, so the likes of Ford (NYSE: F) and Toyota (NYSE: TM) shouldn't need to flood Analog's order sheets with low-margin orders. On the other hand, the first quarter tends to be slow for Analog. All in all, the next quarter should look very similar to this one, which should lead to about 20% better revenue than the first quarter of last year.
This is a fine example of steady execution through difficult as well as easier environments. Can you think of a steadier hand in the chip sector than Mr. Fishman's? Let me know in the comments below.
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