Analog Devices Sees Better Days Ahead

Analog technology giant Analog Devices (ADI 0.73%) reported fourth-quarter results early Tuesday morning. Share prices fell as much as 4.7% at first as the company fell short of analyst expectations across the board. The market reaction turned around to a small gain during the earnings call, where management painted a more handsome picture of market conditions in 2020.

Analog Devices' fourth-quarter results: The raw numbers

Data source: Analog Devices. GAAP = generally accepted accounting principles.

Your average Wall Street analyst had been looking for adjusted earnings near $1.22 per share on revenue in the neighborhood of $1.45 billion. These projections were set in line with the midpoints of Analog Devices' guidance ranges, which in turn were below Street estimates when they were issued three months ago.

Guidance for the first quarter also fell below the current analyst views across the board. Sales are expected to fall 16% year over year, landing at $1.3 billion. Adjusted earnings should stop in the vicinity of $1.00 per share, 25% below the year-ago period's reading. Analysts had been looking for earnings near $1.18 per share on sales of roughly $1.43 billion.

Management pinned the soft results and equally weak first-quarter forecast on "continued trade and macro uncertainty."

Given the disappointing results and next-quarter forecasts found in this report, the 5% drop this morning wasn't much of a surprise.

Image source: Getty Images.

Light at the end of the tunnel

The earnings call came along at 10 a.m., Eastern time, with far more encouraging words from Analog Devices' management.

CEO Vincent Roche spelled out how customers in the communications and industrial end markets are partnering with Analog Devices to drive analog data collection and processing in an increasingly complex business environment.

"We are uniquely positioned to provide the enabling solutions with our comprehensive portfolio of high-performance mixed-signal RF, and microwave, and power management technologies," Roche said. "To that end, as we enter 2020, our opportunity pipeline value is at record levels and increased more than 15% year-over-year."

Later in the call, CFO Prashanth Mahendra-Rajah added a deeper discussion of market trends pointing to a weak first quarter but substantial improvements beyond that.

"From a macro level, it's our take that we're kind of bouncing along the bottom. Certainly, there is ongoing uncertainty with the trade war that's impacting overall demand and customers are putting a pause on CapEx spend," he said. "For communications, in 5G, there is a lull between deployments. [...] It's very early days on the 5G and we are expecting demand to kind of stay soft through the end of this calendar year, but pick up nicely for 2020."

The company is managing some inventory overload in the first quarter, expecting to get back to full manufacturing capacity in support of that 5G trend in the second quarter. The weak seasonality of Analog Devices' first-quarter results will be amplified by these effects, getting back to business as usual in the following period.

What does this mean for tech investors?

As a major player in the tech sector, found at the heart of many component supplier pipelines, Analog Devices functions as a bellwether for the technology industry as a whole. This weak earnings report isn't doing the tech sector any favors, but management's rosier view of 2020 turns that argument upside down.

Taken in the context of optimistic comments from chip industry peers such as Intel (INTC 1.77%) and NXP Semiconductors (NXPI 1.29%) earlier this earnings season, we might be in for smoother sailing in 2020. A big surge in 5G installations seems poised to overpower the headwinds blowing out of the Chinese-American trade conflict.