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What Can Investors Expect From Analog Devices’ Q1 Earnings Report?

By Harsh Chauhan - Feb 23, 2018 at 8:11AM

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The chipmaker is sitting on a lot of catalysts going into its quarterly earnings report.

Analog Devices (ADI -0.80%) has failed to stoke investor enthusiasm despite making the right moves over the past year. The chipmaker has witnessed broad-based growth across its entire business in recent quarters, thanks to the Linear Technology acquisition a year ago. Still, the market has failed to reward the company's consistent performances. The stock is up just 8% over the past year.

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The chipmaker is set to report Q1 2018 results on Feb. 28. Here's what to expect.

A man standing in front of a gray background. Questions marks are drawn on the background.

Image Source: Getty Images.

Impressive growth is coming

Usually, the first quarter of Analog's fiscal year (November-January) is a slow one. But the company is confident that it will beat the seasonal trend thanks to improving traction in the industrial market and an extra week in this quarter.

The midpoint of Analog's first-quarter guidance puts the top line at $1.49 billion, a 52% increase from the year-ago period. This massive increase in the company's revenue is expected to lift its earnings to $1.29 per share, as compared to $0.94 per share in the year-ago period.

The expected strong growth in Analog Devices' top and bottom lines is being driven by the acquisition of Linear Technology, which was completed in March 2017. This has been a big catalyst for the chipmaker, bolstering its position in lucrative markets such as industrial and automotive.

The acquisition has catapulted Analog's addressable market in the automotive space to $3 billion. Analog and Linear's combined annual automotive revenue stood at $900 million in 2016. More important, Analog's automotive revenue shot up 45% last fiscal year, and the rapid growth will continue in the coming quarters as the semiconductor content in cars continues to increase.

The outlook should be strong

Analog recently announced that it plans to consolidate some of the wafer manufacturing and testing facilities that came with Linear Technology. The company will close a wafer fabrication facility in California and a test facility in Singapore. The consolidation will result in a charge of $55 million to $65 million during the first quarter, affecting its GAAP earnings per share, but it will eventually result in $100 million worth of cost synergies, according to the company.

Analog's earnings going forward should get a boost as the transition starts gaining traction, and I'm looking for strong top- and bottom-line guidance when the company reports Feb. 28.

The consumer business, for example, grew an impressive 52% year over year in fiscal 2017, as Analog's business at smartphone giant Apple saw a remarkable increase. Analog supplies the technology to enable the 3D Touch feature in iPhones, and the OLED-based iPhone X carries a more expensive version of this.

Analog's industrial business, meanwhile, is another big beneficiary of the Linear Technology acquisition, jumping 58% last fiscal year. This segment accounts for 46% of Analog's total revenue, and it is going from strength to strength thanks to the company's strategy of targeting fast-growing industrial niches  like factory automation.

Analog Devices has a lot going for it, which should allow it to deliver an investor-pleasing fourth-quarter report.

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