ADI: Analog Devices Disappointment Considered More Disappointing Than Previous One
Analog Devices (ADI) Announced Financial Results for the Second Quarter of Fiscal Year 2007:
Revenue for the second quarter of fiscal 2007 increased to $669 million, an increase of approximately 4% compared to the same period one year ago. Compared to the immediately prior quarter’s product revenue of $657 million, revenue in the second quarter of fiscal year 2007 increased approximately 2%.
Analysts were expecting $659 million in quarterly sales and $0.35 in earnings per share. The company earned $0.37 using Generally Accepted Accounting Principles and $0.40 using non-GAAP (which, of course, translates to “non-accepted”) numbers. The guidance for next quarter of $0.33-$0.37 on revenues of $655-$685 million is below analyst expectations, which were at the high end of the range.
In a mirror image of the last report, shares were down sharply after market hours on what I consider to be a somewhat neutral report. After all, the shortfall compared to next quarter’s estimates was roughly offset by outperformance in the current one, and last we saw lumpy earnings was not a crime.
More or less as we have been forecasting over the last year, (this is still, of course, NOT a recommendation) the excess inventory built up due to overcapacity will impact the fundamentals as the inventory levels correct. As the company describes the process:
Gross margin was also adversely impacted by the Company’s decision to continue constraining utilization levels within internal manufacturing facilities to better balance production, demand, and inventory levels. As a result, inventory declined 1% in the second quarter of fiscal 2007 compared to the immediately prior quarter.
The gross margin is always higher when they are producing more because of the high degree of operating leverage in the semiconductor business. However, unless demand keeps up with the capacity it means a painful period while production is below capacity to even things back out. It should have been no surprise, yet somehow the market suddenly appears to be acting as if it is one.
Go figure.
Disclosure: William Trent has a long position in SMH.
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