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Mixed Signals: a Re-Structured Analog Devices Braces for Recession



February 26, 2008 – Comments (0) | RELATED TICKERS: ADI , TXN , STM

For a company that builds the brains of devices that help them work together, Analog Devices (NYSE: ADI) sure doesn’t play well with others. First of all, their name is incomplete, although a name like “Analog, Mixed-Signal, and Digital Signal Processing Integrated Circuits Inc.” might not have the curb appeal they’re looking for.

Second, and just to be difficult, ADI employs a zany fiscal calendar that has them posting Q1 results while other competitors are reporting year-end. What’s more, it turns out that every seven years they have a 14-week quarter, so comparing Q1 2008 to Q1 2007 is like comparing apples to oranges. Actually, while the more conventional calendar works for competitors like Texas Instruments (NYSE: TXN) and STMicroelectronics (NYSE: STM), ADI crafted its calendar around the particular cyclical trends in product volumes for the various units. Lucky for us we read the fine print, and now we can delve into the results.

Thanks to the sale of two business units, net income skyrocketed by 177% to $1.22 per share. We Fools know that isn’t the real story. Subtracting income from the business sales and discontinued operations, net income was $0.40 per share. This may look like a decline from the $0.44 reported for Q1 2007, but it’s actually an 8% rise from a non-GAAP $0.37 on a comparable basis. Similarly, product revenues declined by 4% to $614 million, but adjusting for the 14-week quarter in 2007, the result is actually a 12% increase in revenue.

Gross margin, which Motley Fool contributor Anders Bylund identified last quarter as something to watch, improved marginally to 61.2%. These gains in gross margin, operating income, and net income are welcome developments, but no more so than the 12 million shares the company purchased last quarter for $359 million.

In a business this sensitive to industrial and consumer-driven demand, the health of the U.S. economy going forward is of utmost concern to a company like Analog Devices. Company CEO Jerald Fishman vaguely alluded to this concern as he essentially targeted zero growth for the coming quarter, and Fools will do well to heed his caution. That being said, I was a satisfied shareholder before I saw signs of a weakening U.S. economy, and I think the company’s track record for innovation within the industry makes it a compelling choice for investors once the economy shows signs of recovery.

Further Foolishness:

Keep it Simple, Analog

Analog Goes on a Diet

Analog Devices Marginalized Again: Fool by Numbers

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