Analog Devices' Earnings Report Kept Chip Stock Investors in a Good Mood

Though Analog Devices warned that the coronavirus outbreak is hurting its February sales to China, it indicated demand is otherwise growing.
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Like many of its peers in recent weeks, Analog Devices  (ADI) - Get Report offered an upbeat view of how chip demand is trending, at least outside of one region.

ADI, a major supplier of both analog/mixed-signal chips and embedded processors, rose 4.5% on Wednesday and hit its highest levels since July in spite of posting a fairly mixed set of numbers in its January quarter report. EPS slightly beat estimates, but revenue was only in-line and ADI’s April quarter sales and EPS guidance ranges were a little below consensus estimates at their midpoints.

However, ADI’s January quarter sales would have been stronger if not for a 31% annual drop in sales to communications end-markets. This is an area that was widely known to be weak, with chip developers such as Texas Instruments  (TXN) - Get Report, Xilinx  (XLNX) - Get Report and Cree  (CREE) - Get Report having reported in January that sales to mobile infrastructure clients are weak amid 5G rollout delays.

Also, the midpoint of ADI’s April quarter sales guidance ($1.35 billion) would have been above a $1.38 billion consensus if not for a $70 million cut related to the coronavirus outbreak. In the wake of warnings from Apple and others, some coronavirus-related headwinds were widely expected.

And outside of Chinese demand, which ADI sees returning to “a more normal level” in March and April, the company struck an upbeat tone about how sales and orders are trending. This includes, to some degree, for the communications end-market, which was indicated by CEO Vince Roche to have a book-to-bill ratio that’s “well above 1.”

Roche also indicated ADI’s industrial chip book-to-bill is strong. And for the automotive market -- a field where chip sales are benefiting from steady increases in the amount of silicon going inside of the average car -- he talked up the design win momentum seen for ADI’s audio and electric car battery management offerings.

Overall, in spite of Chinese and 5G headwinds, ADI forecasts its “B2B” revenue, which covers industrial, automotive and communications sales, will collectively be up by a high-single digit percentage sequentially this quarter.

Since mid-January, several of ADI’s peers, including Microchip Technology  (MCHP) - Get Report, NXP Semiconductors  (NXPI) - Get Report and STMicroelectronics  (STM) - Get Report, have delivered fairly upbeat earnings reports and calls of their own. And even ones that reported some company-specific issues that affected how their shares moved post-earnings, such as TI and ON Semiconductor  (ON) - Get Report, generally signaled that chip demand is improving across a number of end-markets, following the end of 2019’s customer inventory corrections.

Microchip, often seen as industry bellwether due to the breadth of its customer base and its knack for quickly spotting demand changes, said on its Feb. 4 earnings call that its December quarter book-to-bill was “well above 1” after multiple quarters of being below 1. This, along with strong backlog growth and elevated customer order pull-ins, led Microchip to declare the December quarter to represent the sales bottom for the 2019 down-cycle the chip industry witnessed, barring adverse developments related to trade tensions or the coronavirus.

That last qualifier looms large right now for the likes of Microchip and ADI. Certainly, if the coronavirus outbreak continues meaningfully weighing on Chinese demand beyond February, ADI might struggle to make good on its April quarter guidance.

But this risk factor aside, ADI’s numbers and commentary did little to spoil the positive mood of chip stock investors.