Analog Devices (ADI) ends FY23 on a mixed note. What’s in store

Analog Devices, Inc. (NASDAQ: ADI) reported lower-than-expected profit for the fourth quarter as the semiconductor firm’s revenues declined by double digits. Revenues were almost in line with Wall Street’s expectations. The company is experiencing a broad-based slowdown as inventory adjustments continue across markets.

Investing

Analog’s stock made steady gains in the first half of 2023 and peaked in July. Though the shares withdrew from those highs and dropped to a one-year low last month, they bounced back and regained most of the lost momentum since then. The stock looks on its way to set new records this fiscal year. The not-so-impressive earnings dampened investor sentiment to some extent but the stock can fetch stable returns in the long run, thanks to the growing demand for the company’s products. To long-term investors, it makes sense to add ADI to their portfolios before it becomes expensive.

Morgan Stanley upgraded the stock ahead of this week’s earnings, citing the company’s ability to execute well in the challenging business environment. Meanwhile, the Analog management is working to reduce costs, in an effort to boost margins.  

Q4 Outcome

In the final three months of 2023, adjusted earnings declined 26% year-over-year to $2.01 per share from $2.73 per share last year. On a reported basis, net income plunged to $498.4 million or $1.0 per share from $936.2 million or $1.82 per share in the prior year period. The bottom line was negatively impacted by a 16% fall in revenues to $2.71 billion in Q4 from $3.25 billion in the prior-year period. Earnings missed estimates for the second time in a row, after beating regularly for more than three years.

For the first quarter, Analog executives forecast revenue of approximately $2.5 billion, which includes the benefit of a 14th week in the quarter. Operating margin and adjusted operating margin are expected to be around 23.1% and 41.5% respectively. The guidance for adjusted earnings is approximately $1.70. It targets 2024 CapEx to be between $600 million and $800 million, which is down about 45% from 2023.

Cautious Forecast

Analog’s leadership warned that customer inventory digestion would persist into the first half of the new fiscal year as it returns to normal lead times, which also reflects macro uncertainties. The company bets on its diversified business model to generate strong operating margins and free cash flow going forward.

From Analog’s Q4 2023 earnings call transcript:

“Challenging times like these confirm the wisdom and the strength of our business model. The diversification of our business across customers, Applications, and products helps to limit volatility while preserving profitability. Building upon that foundation, we took actions to better ensure we can deliver operating margins in the low 40s and solid free cash flow despite the revenue decline… A resilient financial model enables us to continue making the strategic investments necessary to allow us to capitalize on the upside when the business inflects higher.”

The stock shrugged off the post-earnings slump pretty quickly and closed the last trading session higher. It has gained more than 10% in the past eleven months.